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Lending against securities begins

Mumbai, Jan. 20: Collaterised borrowing and lending obligation, a product of the Clearing Corporation of India to provide a mechanism to borrow and lend funds against securities, was kicked off today.

Sources said that the initial deal was conducted between ICICI Securities and Finance Co and Saraswat Bank, a co-operative bank, for Rs 6 crore for a one-day term. The instrument, which is expected to aid borrowers in meeting their short-term mismatches, has come following Reserve Bank of India (RBI)’s decision to rein in banks’ exposure to the call-money market.

Clearing Corporation will provide guarantee to the facility, which has been blessed by the central bank. As per the conditions, players can borrow and lend funds against securities for maturities of periods ranging between one day to one year.

RBI has been, over the past year, defining the prudent limits on exposure of banks to the call money market so as to reduce the chronic reliance of banks on call market other than for meeting unforeseen mismatches. Prudential limits on the exposure of commercial banks to call/notice money market were stipulated in two stages.

The first stage said that with effect from the fortnight beginning October 5, lending of scheduled commercial banks in the call/notice money market, on a fortnightly average basis, should not exceed 50 per cent of their owned funds (paid-up capital plus reserves) as at the end of March of the previous financial year. However, banks are allowed to lend a maximum of 100 per cent of their owned funds on any day during a fortnight.

Borrowings by banks in the call market, on a fortnightly average basis, should not exceed 150 per cent of their owned funds or 2 per cent of aggregate deposits as at the end of March of the previous financial year, whichever is higher.

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