Mumbai, April 3: The Reserve Bank of India (RBI) has tightened norms on discretionary investments by residuary non-banking companies (RNBCs). The RBI has ruled that RNBCs will not be allowed to make any discretionary investments from April 1, 2007.

According to the current regulations, RNBCs have to invest a large part of their deposits in instruments specified by the RBI. At present, RNBCs are required to invest 90 per cent of their aggregate liabilities to depositors (ALD) in various instruments.

These include fixed deposits or certificate of deposits (CDs) of commercial banks and financial institutions, provided these certificates are rated not less than AA+ or its equivalent by an approved credit rating agency.

The other avenues include securities of the Union or state governments and other bonds that are also rated AA+.

In a circular issued recently, the central bank said with effect from April 1 this year, RNBCs cannot invest less 10 per cent of their ALD in fixed deposits, CDs of banks or financial institutions and 75 per cent in bonds of central and state government.

Bank boards could invest 10 per cent of RNBC’s liabilities at their discretion during 2005-06. From April 1 this year, the limit has been brought down to 5 per cent.

“There will be no discretionary investment from April 1, 2007,” the RBI circular said while adding that after this date, RNBCs will invest all their deposits in fixed deposits, CDs of banks and financial institutions and securities issued by the central and state government entities.

RNBCs, in a meeting with RBI governor Y.V. Reddy last year, urged the central bank to reconsider its earlier decision on discretionary investments as it would affect their survival. The central bank then explained that the rationalisation was done to impart greater liquidity and safety to the investments of RNBCs, thereby increasing the protection available to depositors.