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RBI Allows Standalone Primary Dealers(SPDs) to Borrow in Foreign Currency

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RBI allows standalone primary dealers to borrow in foreign currencyThe Reserve Bank of India(RBI) in exercise of its power given under Section 45W of the RBI Act, 1934 issued a circular and has allowed Standalone Primary Dealers (SPDs) to borrow in foreign currency from their parent companies or authorized entities.

  • These SPDs can now avail access to overdraft facilities in Nostro accounts only for operational purposes.

Note: Nostro Account is a bank account that a domestic bank holds in foreign currency in another country.

Key Points:

i.As per RBI revised guidelines, Such borrowings shall be within the limit for foreign currency borrowings prescribed under the “Master Direction Standalone Primary Dealers (Reserve Bank) Directions 2016” (dated on 23rd August, 2016).

ii.Excess withdrawals if not adjusted within 5 days must be reported to RBI within 15 days from the end of the month in which the limits are exceeded.

iii.As per the guidelines, Authorised persons are classified as Authorised Dealer Category-I banks and Standalone Primary Dealers  are classified as Authorised Dealer Category-III under Section 10(1) of the Foreign Exchange Management Act (FEMA), 1999.

iv.The Boards of the respective authorised dealers or banks are now allowed to set the Net Overnight Open Position Limit(NOOPL) for calculation of capital charge on forex risk.

  • However, such limits should not exceed 25% of the dealer’s total capital(Tier-I and Tier-II capital).

v.RBI has made certain amendments in “Master Direction-Risk Management and InterBank Dealings” (dated 5th July, 2016) and included SPDs within the scope of norms for risk management and inter-bank.

  • This now enables SPDs to engage in foreign exchange products.

vi.RBI has updated directions on reporting of over-the-counter (OTC) foreign exchange derivative contracts and foreign currency interest rate derivative contract to the Trade Repository of the Clearing Corporation of India Limited (CCIL).

Points to Note:

i.As of 31st March, 2023, 7 SPDs are registered with RBI as Non-Banking Financial Companies(NBFCs).

ii.As per the RBI data, funds raised by SPDs increased by 44.4% on Year-on-Year(Y-o-Y) basis in 2022-23. Major source of their funding was borrowings (90.3% of the total source of funds).

RBI Proposes Stricter Norms for Loans to Projects such as Roads and Ports

RBI has proposed stricter measures for project financing . The new measures will make it more expensive for lenders to provide loans for infrastructure and industrial projects such as: roads, transport, ports and power plants.

Key Points:

i.As per the new norms, lenders will be required to set aside 5% of the money they lent as general provisions for all existing and new loans.

Note: At present, banks set aside 0.4% of the project loan amount for non-default exposures.

ii.RBI has also revised its rules on exposure to capital markets like introduction of T+1 settlement by stock exchanges, in which maximum risk is assumed at 30%.

  • Earlier, the norms laid down by RBI are based on T+2 settlement for equities.

Impact of New Norms:

i.The new norms required 1% provision even after project completion (which is more than double the existing provision).

ii.These norms will pose serious challenges to the banking industry as it will affect the profitability of banks heavily invested in infrastructure projects.

About Reserve Bank of India(RBI):
Governor: Shaktikanta Das
Headquarters: Mumbai, Maharashtra
Established: 1 April, 1935