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Private banks go on an overdrive to finance stock jugglers

Calcutta, Sept 16: Some private sector banks are yet again going overboard to fund stockbrokers especially arbitrageurs playing on the derivative and cash markets simultaneously.

For the last few months, one private sector bank has been overstepping limits set by the Reserve Bank of India (RBI) on banks’ exposure to capital markets, but cleverly hiding it. The bank would cut the borrowing limit of leading brokers towards the end of each month so that it could report a figure that was within the RBI-stipulated limits.

Banks are required to report to the RBI their exposures to the capital market at the end of each month. Banks’ exposure to markets is capped at 5 per cent of total assets.

A number of leading stockbrokers said the bank reduced their borrowing limit towards the end of each month, and increased it again at the beginning of the next month. “The bank explained to us that it had to reveal to the RBI its exposure to capital markets at the end of each month. Our borrowing limits had to be pared towards the end of each month so that it could report a comfortable figure,” they said.

For the last few months, there’s been a phenomenal arbitrage opportunity between the cash and derivatives markets. Even HPCL and BPCL, which were hammered down by the Supreme Court ruling on divestment today, are trading at hefty premiums in the derivatives market. The Nifty future is trading at a 28 per cent premium to its spot value.

Arbitrage is a risk-free business: all that a broker has to do is sell a stock future and buy it in the cash market. But brokers need to deploy big amounts to make sizeable profits. Hence, they are in need of funding from banks, which is available to most brokers at 12-15 per cent. For retail clients, the cost of borrowing is a bit higher at 15-18 per cent. With most stock futures trading at an annualised premium of 25 per cent to the spot, brokers make more than 10 per cent in profits even with borrowed funds.

A spokesperson for the RBI said the bank that appears to be flouting norms, was guilty of doing so even previously. She said the RBI would examine whether the bank was understating its exposure to capital markets.

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