RBI issues draft guidelines for accounting for repo transactions

Mumbai, Nov 14 (UNI) The Reserve Bank of India (RBI) today issued Draft Guidelines for Accounting for Repo/Reverse Repo Transactions, suggesting change to capture the economic essence of Repo as a collateralised lending/borrowing transaction that is structured as a legal sale/purchase of securities as recognised by the RBI (Amendment) Act, 2006.

The amendment in the accounting norms would bring such transactions on to the balance sheet of the repo participants in its true economic sense, thus enhancing transparency, RBI said in a release here. The guidelines would be formally announced after taking into account the suggestions and comments on the draft released for public comments.

The proposed draft guidelines seek to revise the guidelines issued in March 2003, which treated repo as a combination of two independent sale/purchase transactions as per the legal provisions prevailing then. The RBI (Amendment) Act 2006 subsequently defined repo as ''an instrument for borrowing funds by selling securities with an agreement to repurchase the securities on a mutually agreed future date at an agreed price, which includes interest for the funds borrowed''.

The securities sold under repo would continue to be reflected in the investment account of the repo seller. Accordingly, the repo buyer would not reflect the securities acquired under repo in his investment account. The actual movement of securities between repo buyer and repo seller would, however, be reflected through contra entries in the balance sheet.

The securities acquired under repo would continue to be reckoned as liquid assets for the purpose of Section 24 of BR Act, 1949 in the books of the repo buyer. Accordingly, the securities sold under repo would not be accorded the benefit of Statutory Liquidity Ratio (SLR) for the repo seller, even though the seller's investment account would continue to show the securities sold under repo.

The liabilities on account of repo borrowing would be included in the net demand and time liabilities (NDTL) calculation for maintenance of cash reserve ratio (CRR). However, inter-bank repo transactions would continue to be netted, as hitherto.

The movement of securities should also be accounted for in the books of the counterparties by showing it as contra entries for the sake of greater transparency.

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