Sound risk management must for banks to carry repo deals in corporate bonds

India Infoline News Service | Mumbai |

Banks should also have a sound risk management practices and mandatory concurrent audit of the investment portfolio, RBI said

The RBI (Reserve Bank of India) in its Second Quarter Review of Monetary Policy 2012-13 decided to permit scheduled urban co-operative banks with strong financials and sound risk management practices as eligible participants to undertake ready forward contracts in corporate debt securities.

Accordingly, scheduled urban co-operative banks, CRAR of 10% or more and gross NPA of less than 5% and continuous record of profits during the previous three years are eligible to participate to undertake ready forward contracts in corporate debt securities.

Banks should also have a sound risk management practices and mandatory concurrent audit of the investment portfolio, RBI said in a notification on Monday.

Further, the repo transactions in corporate bonds should be undertaken only with scheduled commercial banks/PDs and not with other market participants.

Urban co-operative banks which are lenders of funds in a repo transaction may provide for Counter-party credit risk corresponding to the risk weight for such exposure as applicable to the loan /investment exposure.

Urban co-operative banks may ensure that securities acquired under repo along with other Non-SLR investment already in the Balance Sheet should be within the stipulated ceiling of Non-SLR investment (i.e. 10% of a bank’s total deposits as on March 31 of the previous year). The funds borrowed under repo should be within the limit prescribed for call money borrowing (i.e. 2% of the previous year’s deposits).

The amount borrowed by the bank through repo shall be reckoned as part of its DTL and the same shall attract CRR /SLR.

Urban co-operative banks are advised to adhere to the directions as prescribed by Internal Debt Management Department of RBI for repo in corporate bonds from time to time, the notification further said.
 

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