Corporate bonds to be treated on par with govt securities

The government will soon allow banks to pledge corporate bonds as collateral to borrow funds from the central bank under the overnight repo window, although with some limitations, the Securities and Exchange Board of India (Sebi) said in a report.

As of now, banks can only pledge government securities to borrow from the Reserve Bank of India, and allowing them to pledge corporate bond could spur more buying of the debt by lenders.

A Securities and Exchange Board of India (Sebi) report on development of corporate bond market suggests introduction of credit default swaps to facilitate hedging of credit risk by the holders of corporate bonds and reissuance of bonds as permitted by Sebi.

RBI has already allowed banks and PDs to become members of stock exchanges to trade in corporate bonds. Besides, it sought relaxation of investment norms for banks and PDs to facilitate investment in corporate bonds.

RBI has also issued final guidelines for partial credit enhancements by banks to corporate bonds.

The sebi report said it would impose some limits, including limiting the corporate bonds that can be pledged to top-rated securities.

It did not specify when the final approval would be given since it would require change in the RBI Act, while a clearing and settlement mechanism would also need to be developed.

Bankers have long called for this action as a way to develop the country's young corporate debt markets, at a time when many companies are shut out from loans because lenders are focused on cleaning up their portfolios from soured assets.

"Internationally, many central banks accept corporate bonds as collateral for their liquidity operation. It is not uncommon for central banks to take a lead with a view to developing the financial market," said the Sebi report.

The report reflects the views of the finance ministry and a slew of regulators, including the Reserve Bank of India and the country's pension and insurance regulators.

Sebi also proposed allowing insurance and provident fund companies to invest in hybrid capital debt instruments, including additional Tier I or perpetual bonds.