The Reserve Bank of India (RBI) is working on “restricting cash credit and working capital” lending by banks to the top listed companies to 90 per cent of the current levels, an official source told The Indian Express. For the 10 per cent companies will have to issue bonds that banks will initially subscribe to.

The headroom created will free up bank lending for more sectors and ensure a large volume of top quality bond papers arrive in the corporate bond market. The market is critical to finance the fast expanding infrastructure needs of the economy but where volumes are currently at an abysmal level.

The size of the market is estimated at 11.8 per cent of GDP, which is lower than the average for emerging East Asia at 17.2 per cent. For Japan the percentage is even higher at 19.8 per cent.

The plan has been flagged at the meeting of the Financial Stability Development Council last month. The council, chaired by finance minister P Chidambaram brings all financial sector regulators together to frame capital market policies.

Going ahead, the plan is to progressively scale down bank financing between 10-25 per cent of the total debt financing for listed companies in line with international practices. This will persuade the companies to instead float more bond papers to finance their debt, the official said.

The central bank is also examining the exposure of banks to infrastructure SPVs on both standalone basis based on rating and on the basis of group exposure.

The need to strengthen India’s nascent corporate debt market has been raised by a number of committees including the Deepak Parekh committee on infra financing as well as a more recent panel that is looking into infrastructure funding for the Twelfth Five Year Plan.

The central bank also has called for developing the corporate bond market in order to diversify risk, enhance financial stability, and have better matching of risk-return preferences of the borrowers.

The plan

* The plan is to scale down bank financing between 10-25% of the total debt financing for listed companies

* Banks will soon be asked to cut their exposure to top listed companies by 10% of their current levels

* The headroom created will free up bank lending for more sectors and ensure a large volume of top-quality bond papers arrive in the corporate bond market