RBI hikes automatic FDI limit to $ 138 million; calls for tighter norms on bank

The RBI had on March 22 issued a notification permitting local firms to issue shares to non-resident Indians. It said general permission was available only for the issue of shares to non-residents. For acquisition of shares from existing shareholders, the firm had to seek approval from the Foreign Investment Promotion Board (FIPB) or the Secretariat for Industrial Assistance (SIA) and the RBI. The RBI statement said the liberalisation comes after the government’s expansion of the automatic approval route.

CONCERNED over the poor quality of investments by commercial banks in the corporate sector, the Reserve Bank of India (RBI) has proposed that banks’ investment in long-term debentures should be treated as advances.

In its draft guidelines on banks’ investments other than those falling under the Statutory Liquidity Ratio (SLR) issued on April 4, the RBI has suggested limits on such investments and norms for valuation. The RBI notification said it is concerned about the quality of banks’ non-SLR portfolios since it largely comprised privately placed unquoted securities.

"… Debentures must be treated in the nature of an advance when the debenture is issued as part of the proposal for project finance, the tenure of the debenture is of five years and above, the investor has a significant stake in the issue say 10 per cent or more and the issue is part of a private placement…," the draft guidelines said.

Some of the corporate debentures purchased by banks in the recent past had become worthless paper as their value depreciated. “The quality of some debentures raise several questions… banks should stay away from such paper,” said a banker.

Bank investments in non-SLR securities has been growing and formed around 10 per cent of total assets of the banking sector at the end of March 1999.Investment by banks in non-SLR securities stood at Rs 95,000 crore at the end of September 1999.

"Though banks have not reported any significant losses on their holding of unquoted debt, the absence of a secondary market for unquuoted paper raises concerns about the valuation of the portfolio also," the draft guidelines said.

The RBI guidelines have proposed such investment by banks in debentures should be within a limit of 15 per cent of total investments. The central bank has also proposed that debentures falling within the category of investment be valued on the yield to maturity (YTM) basis.

"The rate used for the YTM should be at least 0.5 per cent above the rate applicable to a government of India loan of equal maturity," the draft guidelines said. Banks in India already value their government bonds portfolio according to the year-end YTMs issued by the central bank.

RBI hikes automatic FDI limit