The Reserve Bank of India (RBI) has proposed sweeping changes to deepen debt markets, allowing corporate bodies to lend in the term money segment — long dominated by banks and primary dealers — while widening their access to the government securities market, according to draft norms released on Thursday. The central bank has also introduced total return swaps in credit derivatives, which transfer a bond's entire return to the buyer, unlike default swaps that only insure against default.
Key Changes to the Debt Market Framework
The draft norms mark a significant departure from the tightly controlled framework of 2021, under which call, notice and term money markets were largely the preserve of banks and primary dealers operating under a uniform set of rules. The new approach fragments this structure, selectively widening access to the term segment while retaining tighter controls over overnight markets.
The new approach fragments this structure, selectively widening access to the term segment — defined as unsecured borrowing beyond 14 days and up to one year — while retaining tighter controls over overnight markets.
Key regulatory changes include:
- Primary dealers' borrowing cap raised to 400% of net owned funds, up from 225%, clubbing term money and inter-corporate deposits.
- Trading hours extended: call, notice and term market windows now open until 7pm from the previous 5pm, matching global clock hours.
- Entry of non-bank financial actors: For the first time, All India Financial Institutions (AIFIs) and Non-Banking Financial Companies (NBFCs) will be permitted to both borrow and lend in the term money segment.
- Banks/AIFIs/NBFCs can now lend to non-banks under standard loan norms.
- Introduction of total return swaps in the credit derivatives market, offering a new tool for transferring credit risk.
Comparative Summary of Old vs. New Framework
| Aspect | Old Framework (2021) | New Proposed Framework |
|---|---|---|
| Term money market participants | Banks and primary dealers only | Corporates (lending), AIFIs, NBFCs (borrowing and lending) |
| Primary dealer borrowing cap | 225% of net owned funds | 400% of net owned funds |
| Trading hours (call, notice, term) | Until 5pm | Until 7pm |
| Credit derivatives | Only default swaps | Total return swaps also available |
| Overnight market access | Tightly controlled | Remains tightly controlled |
Implications for Corporate Treasuries and Trade Finance
For corporate treasurers, the ability to lend in the term money market opens a new avenue to deploy surplus short-term cash. According to the RBI draft norms, corporate bodies can now lend in the term segment — defined as unsecured borrowing beyond 14 days and up to one year. This could reduce the cost of capital for companies seeking short-term funds, as the supply of lendable funds increases. Additionally, the extension of trading hours to 7pm aligns with global market practices, allowing Indian corporates to manage liquidity more flexibly across time zones.
The introduction of total return swaps provides a new instrument for companies to hedge bond exposure or speculate on credit performance without owning the underlying security. For trade finance professionals, this adds depth to the credit derivatives market, potentially lowering hedging costs and improving risk management.
For non-bank financial institutions (AIFIs and NBFCs), the permission to both borrow and lend in the term money market is a first. According to the RBI, this move aims to deepen the debt market by broadening participation beyond the banking system. The cap on primary dealers' borrowing — raised to 400% from 225% — is likely to increase market liquidity, benefiting all participants.
However, the RBI retains tighter controls on overnight markets, signalling a cautious approach to systemic risk. The fragmentation of the market structure — with separate rules for term and overnight segments — means treasury teams must adapt to a more complex regulatory landscape. Compliance with the new norms will require updated systems and processes for monitoring counterparty exposure and collateral management.
In summary, the RBI's draft norms represent a significant liberalization of India's debt and money markets, with direct implications for corporate treasuries, non-bank lenders, and derivative users. The move is expected to enhance market efficiency, lower borrowing costs, and provide more tools for risk management, while maintaining prudential safeguards in the overnight segment.
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