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RBI permitted cross holding in infrastructure bonds

With this, now banks would be able to cross hold these bonds among themselves for financing infrastructure and affordable housing loans, which earlier was not permitted.

Jun 2, 2015 13:01 IST
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The Reserve Bank of India (RBI) on 1 June 2015 allowed cross holding in long-term infrastructure bonds. With this, now banks would be able to cross hold these bonds among themselves for financing infrastructure and affordable housing loans, which earlier was not permitted.

The move was taken amidst the concerns that such prohibition on cross-holding was inhibiting the liquidity and tradability of these bonds, as banks are the major participants in the debt market.

However, to preserve the primary objective of allowing regulatory exemptions on CRR and SLR requirements as well as priority sector lending and to prevent double counting of regulatory exemptions allowed, such investments will be subject to following conditions:
• 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).
• Such investments will not be held under Held to Maturity (HTM) category.
• An investing bank’s investment in a specific issue of such bonds will be capped at 2 percent of the investing bank’s Tier 1 Capital or at 5 percent of the issue size, whichever is lower.
• An investing bank’s aggregate holding in such bonds will be capped at 10 percent of its total Non-SLR investments.
• Not more than 20 percent of the primary issue size of such bond issuance can be allotted to banks.
• Banks cannot hold their own bonds.
• RBI’s relevant extant prudential norms will be applicable on such issuances and investments.

All other terms and conditions as mentioned in circulars dated 15 July 2014 and 27 November 2014 will remain unchanged.

Background
RBI in its circular dated 15 July 2014 allowed banks to issue long term bonds for their financing of infrastructure and affordable housing loans. However, banks were not permitted to cross-hold such bonds among themselves.

Moreover, in order to provide liquidity to retail investors in such bonds, RBI in its circular dated 27 November 2014 also allowed banks to extend loans to individuals against such long-term bonds issued by them.

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