Resource Raising Norms – Basel III

All-India Financial Institutions (AIFIs) are key players in our financial markets. They help in gathering funds and allocating resources. In the past, the Reserve Bank set specific limits for these institutions on how much they could raise through certain financial tools. This approach has evolved. Now, there’s a more flexible system called the “umbrella limit.” This limit is tied to the AIFI’s own net funds and sets the maximum they can borrow using various instruments.

The Reserve Bank has also introduced a new rule called the Leverage Ratio. This is part of the Basel III Capital Regulations. It’s a big change because it removes the cap on how much AIFIs can borrow overall.

Umbrella Limit

The total amount an AIFI can borrow at any time shouldn’t be more than 100% of its Net Owned Funds. This is based on the most recent audited balance sheet or as the Reserve Bank decides for each AIFI.

The umbrella limit includes borrowing through four main ways: term deposits, term money borrowings, certificates of deposits (CDs), and commercial papers (CPs). The rules for how AIFIs can gather resources through these methods are detailed in this chapter.

Term Deposits

All-India Financial Institutions (AIFIs) are allowed to offer term deposits. These deposits should have a maturity period of at least one year but not more than five years. The minimum amount for these deposits is set at ₹10,000. Also, AIFIs are restricted from paying more than 1% in brokerage fees on these deposits.

When it comes to withdrawing these deposits early, AIFIs generally don’t allow it within the first year. However, there are exceptions like the depositor’s death, urgent medical needs, educational expenses, or other reasons that the AIFI’s Board approves.

If a depositor does withdraw early, AIFIs can set their own penalty interest rates. But there are some rules. For withdrawals within six months, no interest is paid to the depositor. If the withdrawal is after six months but before a year, the interest paid is an average of the lowest and highest savings deposit rates, as reported in the Reserve Bank’s Weekly Statistical Supplement.

Furthermore, it’s mandatory for AIFIs to get their term deposits rated by a SEBI-approved Credit Rating Agency. This helps in assessing the risk and credibility of these deposits.

AIFIs are generally not allowed to give loans against these term deposits. The only exception is if the Reserve Bank specifically permits it. This rule ensures that the deposits are managed responsibly and securely.

Term Money Borrowings

All-India Financial Institutions (AIFIs) have the option to borrow money for short periods. This kind of borrowing, known as term money borrowing, can be for a minimum of three months and a maximum of six months.

AIFIs have the freedom to decide the interest rates they will pay on these borrowings. This flexibility allows them to manage their borrowing costs according to their financial strategies and market conditions.

However, there’s an important restriction. AIFIs can only borrow term money from specific sources: scheduled commercial banks and co-operative banks. This rule ensures that the borrowing is done through reliable and regulated financial institutions, maintaining the stability and integrity of the financial system.

Certificates of Deposit (CDs)

Certificates of Deposit, or CDs, are a type of financial instrument that All-India Financial Institutions (AIFIs) can issue. These CDs must be in dematerialized form, meaning they are held electronically, and they need to be registered with a depository approved by the Securities and Exchange Board of India.

AIFIs are allowed to issue CDs to anyone living in India. The minimum amount for a CD is ₹5 lakh, and any additional investment must be in multiples of ₹5 lakh.

The duration for which a CD is issued ranges from a minimum of one year to a maximum of three years. AIFIs are not allowed to buy back their own CDs before they mature. Also, there’s no grace period for repaying CDs, and AIFIs can’t give loans against their CDs unless the Reserve Bank specifically allows it.

CDs are issued one business day after the offer period ends. This is known as a T+1 basis, where ‘T’ is the offer closure date.

Regarding pricing, AIFIs can issue CDs at a discount to their face value. They can be issued with either a fixed or a floating interest rate. For floating rate CDs, the interest rate is adjusted periodically based on a benchmark. This benchmark must be transparent and objectively set by a Financial Benchmark Administrator or approved by FIMMDA.

In the secondary market, CDs can be traded over-the-counter (OTC), including on electronic platforms, or on recognized stock exchanges with the Reserve Bank’s approval. The settlement for OTC trades in CDs should be either on the same day (T+0) or the next day (T+1). All secondary market transactions in CDs must be settled on a Delivery versus Payment (DVP) basis.

There are also reporting requirements for CDs. Details of a CD’s primary issuance must be reported to the Trade Repository of the Clearing Corporation of India Ltd. (CCIL) by 5.30 PM on the day of issuance. All secondary market transactions in CDs, whether in the OTC market or on recognized stock exchanges, must be reported within 15 minutes of execution on the CCIL’s platform.

Commercial Papers (CPs)

All-India Financial Institutions (AIFIs) that issue Commercial Papers (CPs) must follow specific guidelines. These guidelines are outlined in the Reserve Bank’s Commercial Paper Directions from 2017. The official reference for these directions is the circular FMRD.DIRD.2/14.01.002/2017-18, dated August 10, 2017. It’s important to note that these guidelines can be updated, so AIFIs need to stay informed about any amendments made over time. This ensures that their issuance and management of Commercial Papers remain in compliance with the latest regulatory standards.

Bonds

All-India Financial Institutions (AIFIs) have the option to raise funds by issuing bonds. They can do this through public offerings or private placements, and they don’t need prior approval from the Reserve Bank for this.

There are a few conditions to keep in mind. First, the bonds must have a minimum maturity of three years from the time they are issued. This means that the bonds should be held for at least this period before they can be redeemed.

Regarding the interest or coupon payments to investors, AIFIs can choose to pay these at a fixed rate or a floating rate. If they opt for a floating rate, it must be based on a benchmark rate that is determined by the market.

Lastly, the bonds cannot have any call or put options, or any other type of exit options, that can be used within the first year of their issuance. This rule ensures that the bonds remain in place for at least a year before any such options can be exercised.

Introduction to Basel III

Basel III Reforms – Introduction

Simple Guide on Minimum Capital Requirements – Basel III

Elements of Regulatory Capital – Basel III

Capital Charge for Credit Risk – Basel III

Credit Risk Mitigation – Basel III

Capital Charge for Market Risk – Basel – III

Operational Risk Capital Charge Calculation Methods– Basel – III

Guidelines for Internal Capital Adequacy Assessment Process (ICAAP) – Basel III

Guidelines for the SREP of RBI and ICAAP of AIFIs– Basel – III

Operational Aspects of ICAAP – Basel III

Leverage Ratio Framework – Basel III