The central bank will also allow money market players to pledge securities to secure daylight overdrafts through simple securities' transfer mechanism.

The move is expected to give the much-needed depth to the gilts market and encourage active participation by players. According to the RBI sources, gilt market players will be allowed to secure overdraft through a simple security transfer mechanism not against payment.

A high-level committee, comprising top RBI officials, has made a proposal to the finance ministry to this effect. Confirming the development a top RBI official said, "To build a vibrant market providing credit facilities to players at the time of transaction is important as many transactions are rejected due to lack of sufficient funds."

Allowing overdraft facility is a longpending demand of the primary dealers and market participants. An RBI official admitted that allowing credit and overdraft facility to market players will expose the central bank to substantial credit risk.

"Overdraft facility is preferable to risking the security transaction system if credit risk could be reduced by devicing an appropriate legal framework," said the high-level internal committee document which is currently awaiting finance ministry's approval.

At present, under the delivery versus payment system, if a security purchased by a dealer is processed prior to the sale of security, than due to lack of funds such transactions are rejected. Under such circumstances, it may not enable the player to deliver securities and receive payment which may also make it impossible for the receiver of funds to complete his side of the transactions.

Thus, to allow market players to actively participate in security buy/sell, the central bank has decided to provide them with an additional incentive to boostthe securities market.

The RBI is of the view that an overdraft policy should be formulated to determine the securities processing procedure to be followed in the book-entry system.

At present, overdraft facility is not allowed by the RBI. A daylight overdraft occurs when payment made for securities transfer received by a bank exceeds payment received from securities which have been delivered.

At present, if banks A and B strike a deal and A brings and sells securities simultaneously and, at the time of processing the transaction, the central bank finds that securities have been bought when the party did not have any cash in its account, than such transactions are rejected.

Under the prevailing system, settlement in gilt transactions are recorded through the submission of SGL transfer form. If the accounts of both the parties have sufficient balance, transactions are processed. However, if there is an insufficient securities balance for the seller or insufficient cash balance for the buyer, thantransactions will be rejected.