The Telegraph
Since 1st March, 1999
Email This Page
Stock shock for bank loans

Mumbai, Nov. 17: The Reserve Bank today ordered banks to pare their exposures to the booming capital markets as the central bank’s concerns mount about asset bubbles and lending to sensitive sectors of the economy.

The central bank today changed a key metric for measuring banks’ exposure to the capital markets by indexing it to net worth rather than the practice of linking it to total advances.

On the face of it, the change will bring down banks’ lending to capital market as the net worth of a bank is much lower than its advances.

However, there are other crucial points that could be bad news for market participants in particular.

Spooked by the IPO scam that erupted earlier this year, the central bank suggested that loans/advances to any single borrower from the banking system for subscribing to IPOs should not exceed Rs 10 lakh.

Although the limit of Rs 10 lakh remains the same, the worrying factor is that the cap on IPO loans will apply to the banking system as a whole. Under the earlier rules, each bank could grant IPO finance to an individual of up to Rs 10 lakh.

Big ticket investors, who resort to bank finance for purposes other than IPOs, also have reason to feel disappointed as the central bank suggested that the entire banking sector could lend only up to Rs 20 lakh to such borrower.

These draft norms came after the RBI announced in the Mid-Term Review of Annual Policy Statement for the year 2005-2006 that the prudential capital market exposure norms prescribed for banks would be rationalised in terms of base and coverage.

The RBI had then announced that a bank’s aggregate capital market exposure will be restricted to 40 per cent of its net worth on a solo and consolidated basis and the consolidated bank’s direct capital market exposure will be to the tune of 20 per cent of its consolidated net worth.

Detailing as to what would constitute capital market exposure, the central bank said the aggregate exposure (both fund and non-fund based) of banks to capital markets in all forms would include direct investment in equity shares, convertible bonds, convertible debentures and units of equity-oriented mutual funds the corpus of which is not exclusively invested in corporate debts, advances against shares/bonds/debentures to individuals for investment in shares.

It also includes advances for any other purposes where shares or convertible bonds or convertible debentures or units of equity-oriented mutual funds are taken as primary or collateral security, secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market makers, loans sanctioned to corporate houses against the security of shares/bonds/debentures or other securities for meeting promoter's contribution to the equity of new companies in anticipation of raising resources and financing to stockbrokers for margin trading.

While the net worth of a bank largely comprises its equity capital and free reserves, the earlier RBI rules said a bank's aggregate exposure to the capital market should not exceed 5 per cent of its total outstanding advances (including commercial paper) as on March 31 of the previous year. The RBI is now suggesting that the aggregate exposure of a bank to the capital markets in all forms (both fund-based and non-fund based) should not exceed 40 per cent of its net worth as on March 31 of the previous year.

Email This Page