Banks allowed to invest in long-term bonds of other banks, with rider

The RBI, on Monday, allowed banks to invest in long term-bonds of other banks. This is subject to conditions whereby not more than 20 per cent of the primary issue size of a bond issue is allotted to investor banks.

Presently banks are not permitted to cross-hold long-term bonds issued specifically for the purpose of financing of infrastructure and affordable housing loans among themselves.

In its latest circular on cross-holding of long-term bonds by banks for financing infrastructure and affordable housing, the RBI said banks’ investment in such bonds will not be treated as ‘assets with the banking system in India’ for the purpose of calculation of net demand and time liability (NDTL).

NDTL (or deposits) is used to determine the cash reserve ratio (CRR) — slice of deposits that banks have to place with RBI — and the statutory liquidity ratio (SLR) – the portion of deposits that banks have to invest in government securities.

Currently, the CRR is at 4 per cent of NDTL and the SLR is at 21.5 per cent of deposits.

Excluding the bonds from NDTL will encourage banks to go in for more such issuances.

The RBI emphasised that the primary objective of allowing regulatory exemptions on CRR and SLR requirements as well as priority sector lending is to encourage issue of long term bonds for lending to infrastructure projects and affordable housing.

To encourage trading in the bonds, the RBI said such bonds are not to be held in the ‘held-to-maturity’ investment category.

An investing bank’s investment in a specific issue of such bonds will be capped at 2 per cent of its Tier-1 Capital or 5 per cent of the issue size, whichever is lower.

Further, an investing bank’s aggregate holding in such bonds will be capped at 10 per cent of its total non-SLR investments. Also, banks cannot hold their own bonds.

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