Welcome to Banking Quest

Introduction

• RBI’s LAF
• Reverse Repo
• Repo
• MSF
• Bank Rate
• CCIL’s Repo
• CDs
• CPs
• NCDs
• IBPC
• Concept of MTM

 RBI’s LAF

RBI’s LAF consist of four products:

• Reverse Repo, Repo, Marginal Standing Facility (MSF) and Bank Rate.

1. Bank Rate : which was once the benchmark rate, over a period of time lost its relevance and its place is now taken over by Repo. 

2. Reverse Repo: Reverse Repo is a money market instrument whereby Commercial Banks can park their surplus funds over and above CRR with RBI for one day at an interest rate of 3.35%. 

• RBI generates and gives one day treasury bills as collateral for the money accepted from the banks. 
• Reverse Repo Rate has been kept deliberately low by RBI in order to encourage banks to go for lending instead of parking the funds with RBI by adopting the lazy banking process. 

3. Repo : is a money market instrument whereby RBI lends money to the commercial banks for one day at an interest rate of 4% against the collateral security of SLR rated Govt. Securities.  Banks who have got surplus SLR, that is, more than 18% can avail this facility from RBI by pledging the surplus SLR with RBI.

4. Marginal Standing Facility (MSF): RBI permits a notional overdraft facility of 2% in the SLR account of the banks, that is, banks can dip their SLRs notionally by 2% and whatever the SLRs released, it can be pledged with RBI for drawing money from RBI.

• During COVID19 pandemic period, this facility was increased from 2% to 3% till 31/12/2021 and will be restored back to 2% from 01/01/2022.

 RBI’s TLTRO

The Reserve Bank of India (RBI) has extended the on-tap Targeted Long Term Repo Operations (TLTROs) scheme by three months till December 31, 2021.

• This is in view of the nascent and fragile economic recovery.
• The RBI had, on October 9, 2020, first announced that it will conduct on tap TLTRO with tenors of up to three years for a total amount of up to Rs. 1 lakh crore at a floating rate linked to the policy repo rate. The scheme was available up to March 31, 2021, but was later extended.
• Liquidity availed by banks under the scheme has to be deployed in corporate bonds, commercial papers, and non-convertible debentures issued by the entities in five specific sectors. This scheme was further extended to stressed sectors identified by the Kamath Committee in December 2020 and bank lending to NBFCs in February 2021.
• The central bank may persist with its easy monetary policy, but there appears to be not many takers for its long-term funding proposals. 
• Banks have returned nearly Rs. 1.61 lakh crore availed through the two dedicated windows opened last year - Long Term Repo (LTRO) and Targeted LTRO.
• Banks that had availed funds under those plans, introduced since April-March last year in different phases, were allowed to reverse these transactions before maturity and avail new funds at the prevailing lower repo rate.
• About Rs 1,23,572 crore and Rs 37,348 crore were repaid by banks under the LTRO and TLTRO schemes, respectively, according to the central bank’s annual report.
• Effective December 4, 2020, it was decided to expand on tap TLTROs to other stressed sectors in synergy with the credit guarantee available under the Emergency Credit Line Guarantee Scheme (ECLGS 2.0) of the government.
• The liquidity availed under the scheme can also be used to extend bank loans and advances to these sectors.
• Investments made by banks under this facility are classified as held to maturity (HTM), even in excess of 25% of total investment permitted to be included in the HTM (held to maturity) portfolio.
• All exposures under this facility will also be exempted from reckoning under the large exposure framework (LEF).
• As per RBI data, under on-tap TLTRO, banks had availed Rs. 5,000 crore on March 22, 2021, and Rs. 320 crore on June 14, 2021.

RBI’s Monetary Policy Committee

Monetary Policy Committee (MPC): Presently in our country, the policy interest rate required to achieve the inflation target is decided by the Monetary Policy Committee (MPC). MPC is a six-member committee constituted by the Central Government (Section 45ZB of the amended RBI Act, 1934).

• The MPC is required to meet at least four times in a year. The quorum for the meeting of the MPC is four members. Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.
• The resolution adopted by the MPC is published after the conclusion of every meeting of the MPC. Once in every six months, RBI is required to publish a document called the Monetary Policy Report to explain: (1) the sources of inflation and(2) the forecast of inflation for 6-18 months ahead.
• The Central Government in September 2016 constituted the present MPC as under:
• Governor of the Reserve Bank of India – Chairperson, ex officio;
• Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy – Member, ex officio;
• One officer of the Reserve Bank of India to be nominated by the Central Board – Member, ex officio;
• Present external members appointed by Government of India:

Jayanth Varma is a known expert in financial markets. He is currently a professor at Indian Institute of Management (IIM), Ahmedabad and teaches courses in capital market, fixed income, alternative investment and corporate finance.

Ashima Goyal: She is a professor of economics at the prestigious Indira Gandhi Institute of Development Research (IGIDR), where she mainly teaches macro-economy. She is also a member of the powerful Prime Minister’s Economic Advisory Council (PMEAC).

Shashanka Bhide has a rich research experience in a number of areas such as agriculture, macroeconomic modeling, infrastructure and poverty analysis. He is currently a senior advisor at National Council for Applied Economic Research (NCAER), a non-profit think tank of economics.

 RBI keeps Repo Rate Steady

• RBI on 10/02/2022 kept key policy rates, including repo and reverse repo rates, unchanged in its monetary policy review. Hence, Repo rate continues to be at the level of 4%.
• The marginal standing facility (MSF) rate and the bank rate remain unchanged at 4.25%. The reverse repo rate also remains unchanged at 3.35%.

 Clearing Corporation of India CCIL

• Clearcorp is  a wholly owned subsidiary of CCIL, was incorporated in June, 2003 to facilitate, set up and carry on the business of providing dealing systems/platform in Collateralised Borrowing and Lending Obligation (CBLO), Repos and all money market instruments of any kind and also in foreign exchange (FX-CLEAR) and currencies of all kinds. 
• Clearcorp has been set up to facilitate CCIL, to segregate its other activities from Clearing and Settlement activities, a risk bearing activity. 
• Accordingly, the Shareholders of CCIL at their meeting held on June 4, 2003 resolved to transfer all activities of the Company relating to Forex Dealing Platform (FX-CLEAR) and Collateralised Borrowing and Lending (CBLO) dealing platform to Clearcorp. 
• TREPS, facilitates borrowing and lending of funds against Government securities, in a Tri Party Repo arrangement. This  has replaced the previous CBLO and is operational from 4th November, 2018.
• TREPS is an anonymous electronic order matching platform. Entities who are admitted to Clearcorp’s Triparty Repo (Dealing) Segment, and having access to the INFINET network, access the dealing system through INFINET. 
• Member’s orders to borrow and / or lend under Triparty Repo are matched on Amount to borrow / lend, Interest rate-and Time priority. All the matched orders i.e. trades of the members flows seamlessly to CCIL for settlement. 
• CCIL settles the trades from TREPS, in terms of its Securities Segment Regulations.

 Certificate of Deposits (CDs)

• CD is a negotiable money market instrument and issued in dematerialized form or as a Usance Promissory Note against funds deposited at a bank or other eligible institutions defined by RBI.
• Introduced by RBI in the year 1990.
• CDs can be issued by:
  • Scheduled commercial banks (excluding RRBs and Local Area Banks) depending upon their fund requirements.
  • Select All-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.
• As per the revised norm released by RBI in June, 2021, Certificate of Deposit (CD) shall be issued in minimum denomination of Rs 5 lakh and in multiples of Rs 5 lakh thereafter.
• CD is a negotiable, unsecured money market instrument issued by a bank as a usance promissory note against funds deposited with it for a maturity period up to one year. 
• CDs shall be issued only in dematerialized form and held with a depository registered with the Securities and Exchange Board of India (Sebi).
• CDs can be issued to all persons resident in India and the tenor of the instrument at issuance should not be less than seven days. 
• NRIs can also subscribe to CDs on a non-repatriable basis. CDs subscribed by NRIs cannot be endorsed to another NRI in the secondary market.
• Further, banks are not allowed to grant loans against CDs, unless specifically permitted by the Reserve Bank. 
• As per the RBI, issuing banks are permitted to buy back CDs before maturity, subject to certain conditions.
• Banks/FIs are allowed to issue CDs on a floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market-based.
• The issuing Bank/FI is free to determine the discount / coupon rate.
• Banks have to maintain appropriate CRR and SLR on the issue price of the CDs.
• CDs in demat form can be transferred as per the procedure applicable to other demat securities.
• There is no lock-in period for the CDs and they are freely transferable.
• The standard form of CD is prescribed by RBI.

Commercial Papers (CPs)

CP, as a private placed instrument, was introduced in Indian in 1990 with the following objectives:

• • To enable highly rated corporate borrowers to diversify their sources of short-term borrowing requirements.
  • To provide an additional instrument to investors.
• CP is an unsecured money market instrument issued in the form of a promissory note. Standard Format of CP is prescribed by RBI.
• CPs can be held in physical form or in demat form.
• RBI prefers keeping CPs only in demat form with any of the depositories approved by SEBI.
• Later on, PDs and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements.
• CPs shall be issued in denominations of Rs.5 lakhs and multiples thereof.
• CP has to be issued at a discount to face value as determined by the issuer.
• Underwriting or co-acceptance facilities for CPs is not permitted.
• Put / Call options are not permitted.

Tenor of CP:

• • Minimum 7 days and maximum one year from the date of issue.
  • Maturity date of the CP shall not go beyond the date upto which the credit rating of the issuer is valid.
• Every issuer of CP must appoint an Issuing & Paying Agent (IPA) for issuance of CP.
• The issuer should disclose to the potential investors its latest financial position.
• Once a deal is confirmed, the issuer should arrange to credit the CP to the demat account of the investor through IPA.
• Rating requirement:
  • The minimum credit rating shall be ‘A3’ as per the rating symbol and definition prescribed by SEBI.
  • The issuer should ensure that at the time of issuance of the CP that the rating so obtained is current and has not fallen due for review.

Eligible Issuers (RBI Cir. of 10/08/2017)

a. Companies, including Non-Banking Finance Companies (NBFCs) and All India Financial Institutions (AIFIs), are eligible to issue CPs subject to the condition that any fund-based facility availed of from bank(s) and/or financial institutions is classified as a standard asset by all financing banks/institutions at the time of issue. 

b. Other entities like co-operative societies/unions, government entities, trusts, limited liability partnerships and any other body corporate having presence in India with a net worth of Rs. 100 crore or higher subject to the condition as specified under 3 (a) above. 

c. Every issue of CP and every renewal of CP should be treated as a fresh issue.

• CP  has to be issued as a ‘stand alone’ product.
• It is not obligatory on the part of the Banks to provide standby facility to the issuers of CP.
• However, Banks are permitted to provide standby facility/backstop assistance by way of credit enhancement for the CPs.
• Non-bank entities (including other corporates) can provide unconditional and irrevocable guarantee as credit enhancement for the CPs provided:
  • The issuer fulfills the eligibility criteria.
  • The guarantor has a credit rating at least one notch higher than the issuer by an approved ECAI.
  • The offer document should in a transparent way  disclose the full details of the guaranteeing company as to its net worth, total guarantees given by the company and how to invoke the guarantee.

Who can invest in CP?

• Individuals, banks, other corporate bodies and unincorporated bodies, NRIs, FIIs can invest in CP.
• FIIs can invest in CPs subject to compliance of:
  • SEBI guidelines.
  • FEMA guidelines.
  • Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.

Buyback of CP:

a. The buyback of a CP, in full or part, shall be at the prevailing market price. 

b. The buyback offer should be extended to all investors in the CP issue. The terms of the buyback should be identical for all investors in the issue. 

c. The buyback offer may not be made before 30 days from the date of issue. 

d. CPs bought back shall stand extinguished.

 Non-Convertible Debentures (NCDs)

• RBI permits Banks to invest in Non-Convertible Debenture (NCD) means a debt instrument issued by a corporate (including NBFCs) with original or initial maturity up to one year and issued by way of private placement; 
• “Corporate” means a company as defined in the Companies Act, 2013 (including NBFCs) and a corporation established by an act of any Legislature. 
• NBFCs shall also adhere to the directions/guidelines issued by the Department of Non-Banking Regulation, RBI. 

Eligibility to issue NCDs 

• A corporate shall be eligible to issue NCDs if it fulfills the following criteria, namely, 

i. the corporate has a tangible net worth of not less than Rs.4 crore, as per the latest audited balance sheet; 

ii. the corporate has been sanctioned working capital limit or term loan by bank/s or all-India financial institution/s; and 

iii. The borrowal account of the corporation is classified as a Standard Asset by the financing bank/s or institution/s. 

• However, point 2 (i) above shall not be applicable to Non-Banking Financial Companies (NBFCs) including Primary Dealers (PDs). 

Rating Requirement :

• An eligible corporate intending to issue NCDs shall obtain credit rating for issuance of the NCDs from one of the rating agencies, viz., the Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd or such other agencies registered with SEBI or such other credit rating agencies as may be specified by RBI from time to time, for the purpose. 
• The minimum credit rating shall be ‘A2’ as per rating symbol and definition prescribed by SEBI. 

Denomination:

• NCDs may be issued in denominations with a minimum of Rs.5 lakh (face value) and in multiples of Rs.1 lakh. 

Maturity: 

• NCDs shall not be issued for maturities of less than 90 days from the date of issue. 
• The exercise date of option (put/call), if any, attached to the NCDs shall not fall within the period of 90 days from the date of issue. 
• The tenor of the NCDs shall not exceed the validity period of the credit rating of the instrument. 

Preference for Dematerialization :

• While the option is available to both issuers and subscribers to issue/hold NCDs in dematerialized or physical form, they are encouraged to issue/ hold NCDs in dematerialised form. 
• However, banks, FIs and PDs are required to make fresh investments in NCDs only in dematerialized form. 

 Inter-Bank Participation Certificates (IBPCs)

• As stated, IBPC is yet another short-term money market instrument whereby the banks can raise money/deploy short-term surplus. In the case of IBPC the borrowing bank passes/sells on the loans and credit that it has in its book, for a temporary period, to the lending bank.
• Only Scheduled Commercial Banks can issue IBPCs.

The various features of this instrument are given below:

a. The minimum period shall be 91 days and maximum period 180 days in the case of IBPCs on risk sharing basis and in the case of IBPCs under non-risk sharing basis the total period is limited to 91 days.

b. The maximum participation in loan/cash credit under IBPC would be 40% of the amount outstanding or the limit sanc­tioned whichever is lower. The participation however, should be in “standard asset” only.

c. Documents to be executed by the borrower in favor of the Issuing Bank shall provide a clause that the issuing bank shall have liberty to shift at its discretion without notice to the borrower, from time to time during the subsistence of the cash credit/loan account, a part or portion of the out­standing in the said account, to another bank/bank’s partici­pating in the scheme.

d. Interest rates are determined between the issuing bank and the participating bank.

e. The issuing bank and the participating bank have to enter into participation contracts in the format prescribed.

f. IBPCs are not transferable.

g. IBPCs cannot be redeemed before the due date.

h. On the date of maturity the issuing Bank makes payment of the IBPC along with agreed rate of interest to the participat­ing bank except in the case where risk has materialized where the issuing bank in consultation with the participating bank may share the recoveries proportionately.

• RBI has permitted foreign banks and private sector banks to treat their investments in interbank participatory certificate (IBPC) to treat it as direct lending to the priority sector. 
• A bank missing its target for priority sector lending will be able to reach the target by buying IBPCs issued by the fellow banks that have already exceeded in achieving their regulatory targets of priority sector advances and issued IBPCs for excess of lending under various categories of priority sector.
• As stated already, there are two types of Inter-Bank Participation certificates (IBPCs); one on risk sharing basis and the other without risk sharing.  
• In case of IBPC without risk sharing, a bank missing the target can always buy an IBPC instrument issued by another bank at a price for a month or so. Later, the seller bank can buy back the portfolio. 
• The IBPC on risk sharing can be issued for 91-180 days and only in respect of advances classified under standard Status where the conduct of account is satisfactory, the safety of advance is not in doubt, and all the terms and conditions are complied with.  
• The aggregate amount of such IBPCs under any loan account at the time of issue is not to exceed 40 per cent of the outstanding in the account. 
• RRBs can also issue Inter‐Bank Participation Certificates (IBPC) of a tenor of 180 days on risk sharing basis to scheduled commercial banks against their priority sector advances in excess of 60% of their outstanding advances

 Concept of Mark to Market (MTM)

Definition: Mark-to-market refers to the reasonable value of an account that can vary over a period depending on assets and liabilities. Mark-to-market provides a realistic estimate of a financial situation. It has been a part of the generally accepted accounting principles in the United States since 1990 and it is regarded as one of good accounting principles.

• Mark-to-market can also be defined as an accounting tool used to record the value of an asset with respect to its current market price. The mark-to-market principle was largely adopted during the 20th century.

Description: Mark-to-market is a tool that can change the value on either side of a balance sheet, depending on the conditions of the market. For example, stocks that an individual holds in his/her demat account are marked to market every day. At the time of closing of the market, the price assigned to each stock is the price that buyers and sellers decide at the end of the day.

• When compared to historical cost accounting, mark to market can present a more accurate representation of the value of the assets held by a company or institution.  It is because, under the first method, the value of the assets must be maintained at the original purchase cost.
• In the latter method, however, the asset’s value is based on the amount that it may be exchanged for in the prevailing market conditions. However, the mark to market method may not always present the most accurate figure of the true value of an asset, especially during periods when the market is characterized by high volatility.
• Mutual fund schemes and stocks are marked to market on a daily basis.
• In Banks, securities kept under HFT and AFS have to be subjected to MTM periodically as per RBI norms. 

RBI’s norms on MTM:

• Held to Maturity: This is also called a Banking Book. Investments classified under HTM need not be marked to market and will be carried at acquisition cost, unless it is more than the face value, in which case the premium should be amortized over the period remaining to maturity.
• Available for Sale: The individual scrips in the Available for Sale category will be marked to market at quarterly or at more frequent intervals than quarterly as per the discretion of the Bank and it should be mentioned in the Board mandated Treasury Policy.
• Held for Trading (HFT): The individual scrips in the Held for Trading category will be marked to market at monthly or at more frequent intervals as per the discretion of the Bank and it should be mentioned in the Board mandated Treasury Policy.
• Most of the banks follow the practice of carrying out the MTM on a daily basis for  securities held in HFT. On a daily basis, they may not pass the accounting entries but a MIS would be generated and placed before the Treasury Head so that he would come to know the notional profits or losses in the trading positions carried by the dealers. 
• Accounting entries are passed invariably at every quarter, June, September, December & March.