The RBI has now allowed banks to increase PCE for corporate bond issuance from 20% to 50% of the bond issue size, subject to a 20% limit for a single bank. This can enhance the bond market for lower rated paper.
Given the high concentration of banks towards large corporate lending, the RBI has now imposed lending limits for banks. Effective FY18, combined banks’ committed lines to a single corporate entity (except SCBs, NBFCs, HFCs) will be limited to 50% of incremental funds raised above the ASCL limit higher than R250 billion in FY18, R150 billion in FY19 and R100 billion from FY20.
If any bank breaches these limits, the incremental exposure will attract additional provision of 3% and additional risk weight of 75%, shared pro-rata by all lending banks. Bankers believe this will gradually affect around 50-70 companies. The RBI is nudging these corporates to borrow from the bond market, though the cost of raising funds could rise.
RBI has now allowed listed companies to lend in the less than 7-day market. They can now lend to banks in the repo market versus parking short-term funds in current accounts (CA).
While these measures won’t impact banks in the near term, over the long term, the corporate bond market can disintermediate banks and reduce their margins. However, it will also improve lower-rated corporates and small and medium enterprises’ access to funds.