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Sunday, Jan 04, 2004

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RBI ups margin on loans against shares to 50 pc

Our Bureau

Mumbai , Jan. 3

AS the stock markets touched their historic highs, the Reserve Bank of India, on a precautionary note, today asked banks to increase the margin on fresh advances against shares/financing of initial public offerings to 50 per cent up from 40 per cent with immediate effect. The higher limit will also be applied in the case of issue of guarantees.

"The margin of 50 per cent will apply to all fresh advances/guarantees issued for capital market operations. The existing advances/guarantees issued may continue at the earlier margins until they come up for renewal,'' said the central bank in a press release.

It has also asked banks to raise the minimum cash margin in respect of guarantees issued by them for capital market operations to 25 per cent within the margin of 50 per cent. Hitherto, the minimum cash margin out of the total margin of 40 per cent was 20 per cent.

Earlier, the banks were required to insist on a margin of only 40 per cent in all the three cases. In the case of loans against shares, the borrower has to furnish a margin in the form of shares, while in the case of bank guarantee the margin is paid in the form of cash and securities such as mutual fund units, Government of India bonds and fixed deposits and for IPO financing the margin is in the form of cash.

"This is a very prudent measure taken by the Reserve Bank,'' said Mr V. Vaidyanathan, Senior General Manager, ICICI Bank, which is one of the prominent players in this business.

The loans against shares business for the entire banking sector is estimated to be a mere Rs 2,000-3,000 crore, out of which retail investors account for Rs 2,000 crore, said Mr Neeraj Swaroop, Country Head-Retail, HDFC Bank.

"The measure indicates that the RBI is concerned about the Bull Run on the bourses and does not want banks to end up in a sticky situation. However, it will not affect our business in anyway. There will be lot of demand for the product since the markets are booming,'' said another senior banker.

This measure by itself is not likely to halt the rally in the markets. It will put a squeeze on the availability of funds to trade in the market, according to Mr Arun Kejriwal, Head, broking firm, KRIS.

According to sources, majority of the loans that are taken against shares are allegedly misused and find their way back into the equity market. This is despite the fact that some banks take a declaration from the customer on sanctioning the loan that the funds will not be used for buying shares or for any other speculative business.

The bankers' line of defence is that there is no practical way to track where the money is going since it is fungible. It is not that all the money goes back into the market, said a banker, companies also avail of loans against shares for working capital requirements.

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