The Reserve Bank of India (RBI) has relaxed the guideline pertaining to short term resource raising by financial institutions (FI). In a recently issued circular to chairman of all the FIs, the central bank has stated that FIs are not required to seek `issue wise' prior approval from the central bank for raising resources by way of issue of bonds provided:

• The minimum maturity of the bond should be 3 years;
• In respect of bonds having call/ put or both options, the same should not be exercisable before the expiry of one year from the date of issue of the bonds;
• The yield to maturity (YTM) offered, at the time of issue of bonds, should not exceed 200 basis points above the YTM on the Government of India securities of equal residual maturities. The effective YTM on instruments having call/ put options should also satisfy this requirement;
• No ‘exit’ option on the bonds will be offered before the end of one year, from the date of issue.

It has also clarified that the outstanding of total resources mobilised at any point of time by an individual FI including funds mobilised under the ‘umbrella limit’ as prescribed by the central bank should not exceed 10 times its net owned funds (NOF).

The move is expected to serve as a boon for the small retail risk averse investors as they will get a few more options to park their money at competitive rates. Thus to tap retail investors and give banks a run for their money, most of the financial institutions are currently in the market with short term deposit instruments maturing between one to five year period offering anywhere between 8% to 10.5%.

In the April credit policy, the FIs were given freedom to decide interest rates on short-term instruments. "It has been decided that FIs may be given flexibility in the matter of fixing interest rates on term deposits. This will facilitate FIs using these instruments in a flexible manner for asset liability management (ALM)," stated the credit policy document issued in April this year. Earlier the rates on term deposits offered by FIs were subject to either the ceiling of 14 per cent per annum or linked to rate offered by State Bank of India (SBI) for comparable maturities.

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