A debt instrument is a tool an entity can utilize to raise capital.
It is a documented, binding obligation that provides funds to an entity in return for a promise from the entity to repay a lender or investor in accordance with terms of a contract.
Debt instrument contracts include detailed provisions on the deal such as collateral involved, the rate of interest, the schedule for interest payments, and the timeframe to maturity if applicable.
As per RBI’s extant Basel III guidelines, if a bank holds a debt instrument directly, it would have to allocate lower capital as compared to holding the same debt instrument through a mutual fund (MF)/exchange traded fund (ETF).
RBI recently permitted banks to invest in debt instruments through mutual funds (MFs) or exchange traded funds without allocating additional charges.
This is to expand the bond market.
This will result in substantial capital savings for banks and is expected to give a boost to the corporate bond market.