Mumbai, Oct. 25: The Reserve Bank today tweaked the capital market exposure limit of banks. However, it has not set a timeframe to bring down the exposure “within permissible limits”.

While a large section of the banks, especially those in the public sector, will be unaffected by today’s move, IDBI Bank and ICICI Bank, with their past history of being financial institutions, will continue to need the RBI’s approval in view of its legacy.

The RBI said it would restrict a bank’s aggregate capital market exposure to 40 per cent of its net worth on a solo and consolidated basis. The RBI will also modify a bank’s consolidated direct capital market exposure to 20 per cent of its consolidated net worth.

The RBI has prudently capped banks’ exposure to the capital market as a proportion of net worth because of the higher risks involved, Fitch Ratings senior director R. Jayakumar said.

Banks exceeding these limits either on solo or consolidated basis need to approach the Reserve Bank with a plan to lower the exposure within the permissible limits. However, banks with sound internal controls and robust risk management systems can approach the Reserve Bank for higher limits. It will issue guidelines for this later.

DSPML joint managing director Amit Chandra said: “Changing the maximum limit of capital market exposure from 5 per cent of advances to 40 per cent of the net worth is a logical step since exposure to any sector should ideally be linked to its risk-taking ability. Differentiating this by using net worth will mean that banks with a strong capital base will evaluate such lending on merits.”

“The move will fortunately not have a disruptive impact on the markets since most of the government banks have exposures to capital market that are well below the prescribed limits,” he added.