Banks Can Borrow 25% Of Tier-1 From Global Markets

Mumbai, April 29: | Updated: Apr 30 2002, 05:30am hrs
The Reserve Bank of India (RBI) has decided to allow banks borrowings up to 25 per cent of their unimpaired Tier-1 capital from the overseas market. The borrowings should be within the banks’ open position limit (OPL) and maturity mismatch limits (Gap Limits) for which detailed guidelines are to be issued. On the same lines, the existing limit of 15 per cent of unimpaired Tier-1 capital for investment in overseas market has been raised to 25 per cent of unimpaired Tier-1 capital. The investments in money market instruments will be within the existing OPL and Gap Limits. The RBI said that this will ensure uniformity in overseas borrowing and investment portfolio of banks.

Said HSBC’s treasurer, India, treasury and capital markets, Tarun Mahrotri: “I think it is a step in the right direction and a move towards a more liberalised policy. This move stems from the substantial foreign exchange reserves the central bank has, thus making it more comfortable in making this allowance to the banks. This is a welcome step as it will integrate the domestic money market with the foreign exchange market.”

At present, banks in India are allowed to borrow from and invest in the overseas market up to 15 per cent of their unimpaired Tier-1 capital or $10 million, whichever is higher. The present move is expected to enable banks to have greater operational flexibility and to align the domestic interest rate with overseas market. The increased borrowing limit will enable banks to get cheaper funds and help them to have adequate rupee resources and thus, reduce the cost of funds for the banks. While it will enhance the process of integration of the local financial market with the global market, different segments of the domestic market will also get further integrated. The RBI has also proposed to grant permission with appropriate safeguards for crystallisation of external commercial borrowings (ECBs) into rupee loans where it is considered necessary by banks to do so. This will provide greater freedom and flexibility to banks in their fund management.