ICICI and Industrial Finance Corporation of India, governed by the Companies Act, will be allowed to raise short-term inter-corporate deposits (ICDs) as well. However, the institutions will not be allowed to access the call-money market, central bank sources said.

The Reserve Bank is expected to announce the new norms in its April credit policy. The move is momentous as institutions, which have already taken the plunge into short-term financing, will be able to raise short-term resources to avoid asset-liability mismatches. At present, institutions are allowed to raise term deposit between one and five years.

The Reserve Bank move is in response to the recommendations of the Khan working group on harmonising the role andoperations of DFIs and banks submitted last year. "With regard to enhancing and rationalising access to short-term funds for DFIs, the matter is being resolved through discussion with DFIs," the RBI discussion paper on the Khan committee recommendations, released last month, said.

The Khan panel recommended that overall ceiling for DFIs' mobilisation of resources by way of term-money borrowings, CDs, term deposits and ICDs at 100 per cent of the net owned funds (NOF) of the institution should be removed.

However, the central bank is unlikely to remove the cap. "The RBI is set to allow institutions to raise term deposits, CDs and ICDs of less than one maturities up to 100 per cent of their NOFs on an outstanding basis," sources said.

The institutions will continue to raise long-term funds through debt issues. Going by the current stipulation of the central bank, the coupon on those bonds cannot be pegged at a higher rate than 200-250 basis points above the coupon of a comparable maturity governmentpaper.

Analysts have interpreted the move as part of the central bank's strategy of pulling down the barrier between banks and institutions in a phased manner. Two years ago, former RBI governor C Rangarajan had allowed institutions to raise short-term resources through one-year term deposits. In May 1997, the RBI also abolished existing instrument-wise limits for financial institutions' resource mobilisation and introduced an umbrella limit linked to their NOF. By linking the umbrella limit, the Reserve Bank had raised institutions' exposure to term deposits, CDs and term money market almost by 100 per cent.

Prior to that, institutions were garnering resources by way of term-money borrowings (from three to six months), CDs (one to three years) and term deposits (three years and above) subjects to limits prescribed by the RBI. The sub-limits were replaced by an umbrella limit equal to the NOF of financial institutions in 1997.

With the reduction of the maturity period of term deposits, the institutionswill be able to position themselves as direct competition to banks. They could nibble into bank deposits by offering higher interest rates as the institutional term deposits are not subjected to reserve requirements, bank analysts point out.

However, it may not be an unlimited freedom for financial institutions on the resource mobilisation front. The central bank is examining the imposition of reserve requirements on institutions' funds. The RBI Act needs to be amended for the purpose of clamping down reserve requirements on institutional funds.

The removal of some of the restrictions on raising short-term funds by financial institutions will enable them to accelerate and broadbase their foray into funding short-term assets. While this will undoubtedly help in giving more flexibility to FIs to cover asset-liability mismatches, the real problem lies in the institutions' access to long-term funds. The crux of the issue is that while FIs are expected to fund long-term assets as part of the developmenteffort, they have no access to matching long-term liabilities.