NBFCs allowed to float perpetual debt
The central bank has tweaked the norms to give some breathing space to banks and non-banking finance companies (NBFCs).
By ET Bureau |
MUMBAI: The central bank has tweaked the norms to give some breathing space to banks and non-banking finance companies (NBFCs). While finance companies have been allowed to float perpetual debt to shore up their capital, banks have been given some leeway on treating defaults on forex derivatives ��� an accounting relaxation that will reduce the level of bad loans in a bank���s books.
The move will not benefit NBFCs immediately. They are reeling under a severe liquidity crunch, with banks and mutual funds having snapped the credit lines to them.
Banks, on the other hand, may benefit a little, given the volatile currency markets, marked-to-market losses and possible defaults on certain cross-currency derivatives. Earlier this month, the Reserve Bank of India (RBI) had said that all loans to a corporate which has defaulted on a forex derivative contract should be classified as bad loan.
Now, the central bank has relaxed this condition and has decided to confine the bad-loan classification to only the dues arising from forward contracts and plain vanilla swaps and options.
To improve the cash position of NBFCs, RBI has allowed systemically important non-deposit-taking finance companies to raise capital through perpetual debt. The move will benefit large finance companies floated by foreign banks and large infrastructure institutions.
However, bankers say that present market conditions are extremely tough for perpetual bonds, floated even by state-owned banks. Perpetual debt, which provides companies with liquidity, is recognised as tier-I capital for the purpose of meeting RBI���s capital adequacy norms.
To ensure that perpetual bonds are sold only to qualified institutional investors, the central bank has kept the minimum investment threshold by a single investor at Rs 5 lakh. ���Such perpetual debt shall be eligible for inclusion as tier-I capital to the extent of 15% of total tier-I capital as on March 31 of the previous accounting year,��� RBI said in its circular.
���It���s a step in the right direction. But it may not be very beneficial as it would not be possible to raise money through this route, given the tight liquidity condition. In some cases such as a structured strategic transaction, companies may be able to raise some money through perpetual debt,��� said Rajeev Suneja, senior VP, Kotak Investment Bank.
The move will not benefit NBFCs immediately. They are reeling under a severe liquidity crunch, with banks and mutual funds having snapped the credit lines to them.
Banks, on the other hand, may benefit a little, given the volatile currency markets, marked-to-market losses and possible defaults on certain cross-currency derivatives. Earlier this month, the Reserve Bank of India (RBI) had said that all loans to a corporate which has defaulted on a forex derivative contract should be classified as bad loan.
Now, the central bank has relaxed this condition and has decided to confine the bad-loan classification to only the dues arising from forward contracts and plain vanilla swaps and options.
To improve the cash position of NBFCs, RBI has allowed systemically important non-deposit-taking finance companies to raise capital through perpetual debt. The move will benefit large finance companies floated by foreign banks and large infrastructure institutions.
However, bankers say that present market conditions are extremely tough for perpetual bonds, floated even by state-owned banks. Perpetual debt, which provides companies with liquidity, is recognised as tier-I capital for the purpose of meeting RBI���s capital adequacy norms.
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To ensure that perpetual bonds are sold only to qualified institutional investors, the central bank has kept the minimum investment threshold by a single investor at Rs 5 lakh. ���Such perpetual debt shall be eligible for inclusion as tier-I capital to the extent of 15% of total tier-I capital as on March 31 of the previous accounting year,��� RBI said in its circular.
���It���s a step in the right direction. But it may not be very beneficial as it would not be possible to raise money through this route, given the tight liquidity condition. In some cases such as a structured strategic transaction, companies may be able to raise some money through perpetual debt,��� said Rajeev Suneja, senior VP, Kotak Investment Bank.
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