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Banks to hike margins for advances against shares

Mumbai, Jan. 3: The Reserve Bank of India (RBI) today directed banks to raise margins to 50 per cent from the existing 40 per cent with immediate effect on all advances against shares, financing of initial public offerings and guarantees to control their exposure to the capital market.

The central bank has also asked commercial banks to raise the minimum cash margins for guarantees issued for capital market operations to 25 per cent from 20 per cent.

The 50 per cent margin would apply to fresh advances and guarantees issued for capital market operations. The existing advances and guarantees may continue at the earlier margins until they come up for renewal, the RBI said. The RBI diktat has come only a day after the sensex surpassed the 6000-mark to close at an all-time high of 6026.59.

The RBI move was welcomed by capital market analysts who interpreted it as a measure aimed at insulating banks against the risk arising from lending against shares.

“The RBI does not want banks to go through a problem similar to the one faced during the Ketan Parekh scam when a few of them were over-exposed to capital market. It may also be concerned with the sharp run-up in equity values in recent times,” an analyst said.

However, brokers feel that the RBI move is unlikely to make any impact on the current state of the markets. Sources said the bull run, which is largely triggered by huge FII inflows coupled with strong corporate and economic fundamentals, is not run on banks’ financing.

“The current bull run is more liquidity-driven and many of the investors have not resorted to bank borrowings to buy shares,” ASK Raymond James associate vice-president, portfolio management services, Dhiraj Sachdev said.

RBI officials said though the central bank has not come across any troublesome signals regarding banks’ exposure to capital market, it would be prudent to avoid any pitfalls arising from a falling market.

In May 2001, the RBI prescribed norms which required banks to increase margins on loans against shares to a uniform 40 per cent for loans against dematerialised shares as well as shares held in the physical form. The guidelines also included a proposal that each bank should fix within the overall ceiling of 5 per cent for capital market exposure a sub-ceiling for advances to brokers and individual stockbroking entities.

In August 2002, the RBI had said commercial bank financing for PSU divestment will be outside the 5 per cent ceiling. It, however, added that the relaxation will be subject to its clearance on a case-by-case basis.

Banks were told that if their capital market exposure in relation to the total advances exceeded the ceiling of 5 per cent, a relaxation will be considered provided safeguards regarding margins, internal control and risk management systems are adopted.

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