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The Reserve Bank of India has allowed cross-holding of senior bonds of Indian lenders, subject to certain conditions including that the proceeds of such bonds should be used for financing of infrastructure and affordable housing.
The central bank announced the decision in its first bi-monthly monetary policy statement today. Detailed guidelines will be issued shortly, the RBI said.
As of today, banks' investment in these senior bonds will not be treated as "assets with the banking system in India", according to the RBI's policy statement.
Also, the RBI will limit a bank's participation in a particular senior bond issue by prescribing certain limits. "Its aggregate holding of such bonds will also be subject to certain limits in relation to its own assets", the statement said.
"Long term bonds held for trading will reduce the bank's priority sector and liquidity benefits obtained from its own issuance of LTBs," said the RBI.
Market players said removal of restrictions on the cross-holding of senior bonds will provide a boost to such issuance, which are a key source of long-term funding for the country's lenders.
It was only in July 2014 that the RBI allowed Indian lenders to issue onshore senior bonds, with the aim of allowing banks to match the maturities of their assets and liabilities related to infrastructure and affordable housing sectors.
India's mostly state-owned banks have shied away from issuing senior bonds in the local market simply because the Banking Regulation Act of 1949 did not explicitly allow them to do so. As a result, almost half of all bank funding in the country matures in one year or less, IFR has reported earlier.
As banks were not allowed to invest in senior bonds, some of the early issuances faced investor restrictions and closed without exercise of the greenshoe options.
The RBI's U-turn on the regulation comes after banks sought relief on this front and asked for a restrictive access to buy senior bonds.
Icra, a local associate of Moody's, estimated last year that senior bond issuance in India could range between Rs 24 lakh crore (US$38.5bn) and Rs 29 lakh crore between 2015 and 2020.
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