Home >Politics >Policy >RBI to allow banks to substitute collateral under LAF window

The Reserve Bank of India (RBI) plans to allow market participants to substitute collateral under the liquidity adjustment facility (LAF) window to give them more flexibility and improve the liquidity of these instruments.

This facility will be available from 17 April, the regulator said on its website. Under the repo window, banks have to place government bonds as collateral to borrow from the central bank. Separately, the regulator said that it will continue using methods such as open market operations, cash management bills, treasury bills and variable rate repo and reverse repo securities to drain excess liquidity from the system.

It also laid out several other regulatory proposals for the banking and financial system. For one, the regulator plans to introduce a new and improved prompt corrective action (PCA) framework for banks with weak balance sheets. Typically, when a bank breaches the lower limit of its capital base during any quarter, along with a build-up of large amount of bad loans and fall in return on assets, RBI initiates this action to limit the bank’s lending activities and help it fix its affairs. Banks under PCA would be required to conform to mandatory and discretionary actions that the central bank would decide. RBI said the revised framework would be issued by mid-April 2017.

Speaking on the asset quality problems in Indian banking after RBI’s monetary policy announcement, deputy governor S.S. Mundra said the regulator, and banks in general, are cognizant of the fact that there is no one-size-fits-all approach while attempting resolution of stressed loans. Mundra said that the regulator is considering new measures to deal with bad loans while also tweaking existing stress resolution tools if necessary.

The Rs7 trillion bad loan problem in the Indian banking sector is led by public sector banks, which are struggling with recovery and resolution of stress on their books.

RBI has also decided to increase the entry barrier for asset reconstruction companies (ARCs) by mandating a net owned funds base of Rs100 crore compared with Rs2 crore earlier. Detailed guidelines in this matter would be released later this month, the regulator has said.

Separately, the regulator is also planning on allowing banks to invest in Infrastructure Investment Trusts (InvITs). RBI has also decided to not activate the countercyclical capital buffer as of now, which would have forced banks to set aside a certain portion of their capital as a buffer for difficult times.

The central bank plans to introduce steps to improve the national electronic funds transfer (NEFT) infrastructure, rationalize the merchant discount rate (MDR) and issue renewed guidelines on the issuance and operation of prepaid payments instruments (PPIs), it said.

RBI said that it is initiating a pilot project on financial literacy at the block level to explore innovative and participatory approaches to financial literacy.

A pilot project will be commissioned in nine states across 80 blocks by non-government organizations (NGOs) in collaboration with the sponsor banks. The sponsor banks will enter into contracts with the identified NGOs by 30 June. Thereafter, the NGOs will start operating the centre for financial literacy within three months of entering into contracts with banks.

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