Recent measures a fillip for nascent bond market

With ever increasing levels of non-performing assets (NPAs) in the banking system, the Reserve Bank of India (RBI) has been seeking ways to reduce the burden of providing credit on banks. In particular, the RBI has emphasized shifting long-term credit requirements such as project loans, and credit to borrowers with a large exposure to the banking system, to the bond market. Following its monetary policy announcement in April, the RBI released a discussion paper on facilitating “credit supply” for “large borrowers” through the bond market.

This discussion paper was a follow-up to one issued on the same subject in March 2015, and focused on discouraging banks from providing credit to borrowers exceeding a specific size so as to reduce credit concentration risk in the banking system. An ancillary goal of the discussion papers was to encourage borrowers to tap the bond market for their working capital and term loan requirements. Final guidelines, effective from 1 April 2017, were issued by the RBI on 25 August.

The guidelines define a “specified borrower” as one whose credit exposure to the banking system (including through privately placed debt instruments) exceeds ₹250 billion (US$3.74 billion) in financial year 2017-18, ₹150 billion in 2018-19, and ₹100 billion from 1 April 2019 onwards. Notably, the RBI’s frequently asked questions section clarifies that external commercial borrowings and trade credits raised from overseas branches of Indian banks will count towards the aggregate credit exposure of an Indian borrower.