What changed
Earlier, banks were barred from investing in non-SLR securities with original maturity below one year, except Commercial Paper and Certificates of Deposit. This circular permits banks to invest in Non-Convertible Debentures (NCDs) with original or initial maturity up to one year, subject to conditions. It also exempts these NCDs from the listing and rating requirements that apply to other non-SLR securities.
What it means for you
Banks now have a new avenue for deploying short-term surplus funds into corporate debt, potentially improving yield on liquidity. However, they must still adhere to existing prudential guidelines and ensure the NCD proceeds are used for purposes eligible for bank finance. The exemption from listing and rating reduces compliance burden but demands stronger internal credit assessment.
What you must do
- Update your investment policy to include short-term NCDs (up to 1 year) as a permissible asset class.
- Verify that the issuer's disclosure document clearly states the purpose of the NCD and that purpose is eligible for bank finance under the Master Circular on Bank Finance to Non-Banking Financial Companies.
- Ensure robust internal credit risk assessment for these unlisted/unrated NCDs, as listing and rating requirements are waived.
- Monitor compliance with extant prudential guidelines on non-SLR investments, including exposure limits and due diligence.
Who it affects
All commercial banks (excluding Regional Rural Banks), Treasury and investment departments of banks, Corporate issuers of short-term NCDs, including NBFCs
Does this circular apply to Regional Rural Banks?
No, the circular is addressed to all commercial banks excluding Regional Rural Banks.
Are these short-term NCDs exempt from listing and rating requirements?
Yes, the circular explicitly states that the earlier guidelines on listing and rating requirements for non-SLR securities do not apply to banks' investments in these NCDs.
What must the issuer disclose for these NCDs?
The issuer must disclose the purpose for which the NCDs are being issued in the disclosure document, and that purpose must be eligible for bank finance as per RBI's Master Circular on Bank Finance to NBFCs.