The Reserve Bank of India has finally come out with a notification allowing banks to issue masala bonds, which are rupee-denominated bonds, in foreign markets. The move is expected to help the banks to improve their capital base and financing infrastructure. The central bank said banks can raise perpetual debt instruments, which can be considered for calculating a bank’s additional tier-1 capital, or debt capital instrument that can go into calculating a bank’s tier-2 capital. These bonds will be issued according to the Basel-III norms and therefore, will have loss absorption clause. Under this clause, a bank can choose not to honour the coupon payment in case of financial stress. For financing infrastructure and affordable housing, the banks can issue long-term bonds, which do have the loss absorption clause. Earlier, RBI had said banks can tap overseas markets with rupee bonds. The rupee bond route will open an additional avenue to raise funds for banks and will help develop the market of rupee-denominated bonds abroad. The borrowing would still have to be within the overall limit of foreign investment in corporate bonds, which is pegged at Rs 2,44,323 crore.
