Mumbai: The Reserve Bank of India (RBI) has released draft guidelines for borrowers to take loans from banks by pledging corporate debt securities as collateral, a move expected to boost secondary market trading in company bonds.

Cheaper borrowing: The central bank said that a margin of 25% or above would be applicable for availing of the facility. Ramesh Pathania / Mint

RBI said that a margin of 25% or above would be applicable for availing the facility. If a company deposits a corporate bond worth Rs100, it will get not more than Rs75 as a loan.

The facility will mean that the spread between a corporate bond and a similar-maturity government bond would narrow, and firms will find it cheaper to borrow from the market, according to S.S. Raghavan, head of treasury at IDBI Gilts Ltd, a firm that trades in bonds.

“The amounts borrowed in repo (by selling of corporate debt securities) shall be reckoned as borrowings for computation of CRR (cash reserve ratio) and SLR (statutory liquidity ratio) by banks," RBI said in its draft guidelines.

Until now, banks have been counting only bonds issued by the Union or state governments for computing their CRR, or the proportion of deposits they have to keep with the central bank, and SLR, or mandatory investments in government bonds. CRR is now 5% and SLR 24%.

Only securities of listed companies with AA rating or above can be pledged as collateral. Short-term commercial paper, certificates of deposits and other instruments including non-convertible debentures of less than one year will be excluded.

“It’s quite a positive development for the corporate bond market," said Alpana Dave, chief dealer, corporate bonds, at ICAP India Pvt. Ltd. “This is excellent that AA papers have been allowed for repo which will boost their demand in the market...the participation in the secondary market will increase manifold."