New norms for CP, investment in shares set

The RBI also said that while investing in shares, the risk-profile and volatility in prices must be kept in mind. “Individual banks, can set their respective ceiling even lower,” it said, adding that that in case any banks whose investments in equities are in excess of 5 per cent of the outstanding credit as on March 31 this year, they should gradually scale it down to conform to the prudential norm.

In respect of those banks where the present outstanding investments in equities are relatively small and well below the 5 per cent overall ceiling, the RBI said that “as a prudential measure, the Board should also lay down an annual ceiling for fresh investments in equities so that any increase in fresh investments in equities take place in a phased, gradual, and cautious manner within the absolute ceiling fixed by the Board for each year.”

The new CP/CD guidelines are aimed at making CPs stand-alone instruments and provide flexibility while raising CDs. “The new guidelines are expected to provide considerable flexibility to participants and add depth and vibrancy to the CP market while at the same time ensuring prudential safeguards and transparency,” RBI said.

The new guidelines will enable companies in the services sector to more easily meet their short-term working capital needs. At the same time, banks and financial institutions will also have the flexibility to fix working capital limits duly taking into account the resources pattern of companies finances including CPs.

Under the guidelines, the threshold for corporates to be eligible will be a tangible net-worth of Rs four crore; a sanctioned working capital limit from a bank/FI; and is a standered borrowal account. Further, primary dealers, satellite dealers (SDs), and FIs can also issue CPs. CPs should have a minimum credit rating `P2′ from Crisil or such equivalent rating by other approved agencies. CPs should have a minimum maturity period of 15 days and a maximum upto one year. The minimum denomination will be Rs five lakh and multiples thereof.

The central bank’s guidelines further mentioned that "only a scheduled bank can act as an issuing and paying agent (IPA). CPs may be held by individuals, banks, corporates, unincorporated bodies, NRIs and FIIs. CP can be also issued as a promissory note or in a dematerialised form.

In case of CDs, RBI said: "At present, while the minimum maturity period for CDs is fixed at 15 days, there is also a restriction that CDs issued by banks and FIs cannot be transferred or transacted in the secondary market before 15 to 30 days from the date of issue. With a view to providing flexibility and depth to the secondary market, it is proposed to withdraw the restriction on transferability period for CDs issued by both banks and FIs."

Banks to decide penal interest rate

MUMBAI:In a significant move, the Reserve Bank of India (RBI) has allowed banks to decide the penal interest rate they charge on the loan-defaulters. This is a departure from the prevailing system wherein the penal interest was capped “at not exceeding 2 per cent over a bank’s prime lending rate (PLR).”

Under the terms so far, the banks were advised that the overall penal and additional interest to be charged should not exceed 2 per cent over and above the rate of interest applicable normally charged to respective borrowers.

The central bank has emphasised that the decision on interest rate should be based on principles of transparency, fairness, incentive to service the debt and due regard to the genuine difficulties of customers. Also, the banks should not in any way take undue advantage from customers.

The RBI reasoned that the growing non-performing asset (NPAs), cost of funds, underlying credit risk and numerous other factors have increased the pressure on the banks. The RBI felt that the banks should be given more power and authority to deal with problems on this front. The present penal interest rate is 2 per cent above the PLR as per the RBI norm.