Reserve Bank tells banks to outline bond risks

Reserve Bank tells banks to outline bond risks

Mumbai: The Reserve Bank of India (RBI), the country’s central bank, said on Wednesday that banks that sell bonds to retail investors cannot use their fixed deposit rates as the benchmark for any floating-rate paper.

Noting that a few banks “have expressed interest to issue retail bonds", RBI directed the banks to inform buyers how the bonds differ from fixed deposits. The bonds will not enjoy any insurance cover; bank deposits of up to Rs1 lakh are covered by a deposit insurance scheme.

The RBI directive is aimed at enhancing investor awareness of risks associated with such capital instruments. RBI said “all the publicity material, application form and other communication with the investor should clearly state in bold letters (with font size 14) how is different from fixed deposit..."

State Bank of India (SBI), the country’s largest lender, has been planning to issue Rs3,000-4,000 crore worth of long-term bonds to retail investors. According to SBI officials, the bonds will be of 10-15 year maturities and issued in small tranches.

Going by the present rates for corporate bonds, the AAA-rated SBI may be able to raise the funds at about 8.7%, higher than the 7.5% that it offers customers for 8-10 year bank deposits.