The Hindu Business Line : RBI hikes margins on loans against shares

THE Reserve Bank of India has tightened the norms for bank loans against shares. Margins against such loans have been raised to 50 per cent from 40 per cent with immediate effect.

The revised rate is applicable to all bank advances against shares, including initial public offers (IPOs) and issue of guarantees.

The central bank has also raised the minimum cash margin to 25 per cent, from 20 per cent.

The move, which is seen as an attempt to curb excessive speculation in the equity market by using bank funds, has come at a time when the market is on a continuous bull run.

In fact, the latest RBI directive reverses its earlier order of May 2004 when the margin in respect of advances against shares, financing of IPOs and issue of guarantees had been reduced to 40 per cent from 50 per cent, while the minimum cash margin was lowered to 20 per cent from 25 per cent.

Ironically, the move comes four days after the Securities and Exchange Board of India suggested modifications to the margin-trading guidelines in order to make it more attractive. SEBI's secondary market advisory committee said in its report that the margin-trading facility has not been put to optimum use by market participants.

The equity markets have been on a tremendous high for the last several weeks. The benchmark indices have been frequently touching new levels. This move by the central bank is expected to reduce liquidity in the markets. However, as the current rally is being largely funded by foreign institutional investors, market participants do not see the increased margin making a major impact on the bourses.

Brokers expect the market to stay on course at least till the corporate earnings season in mid-January and do not expect the current RBI move to be a significant dampener.

Bankers are of the view that the hike is an attempt to cushion any steep fall in the capital markets. "The move is in response to the Sensex scaling new highs over the past few weeks. It is a precautionary measure to ensure that banks are secure on their lending," said a senior official with a leading public sector bank.

The RBI's move assumes significance in the context of some banks recently approaching the regulator to increase their 5 per cent aggregate limit on capital market exposures. As per RBI regulations, a bank's aggregate exposure to the capital markets covering direct investment in equity shares, convertible bonds, debentures, units of equity-oriented mutual funds, advances against shares to individuals, for investment in equity shares, including IPOs, bonds and debentures, should not exceed 5 per cent of their total outstanding advances as on March 31 of the previous year. Currently, all banks are well under the 5 per cent limit.

The Finance Minister in his Budget speech had announced that banks with strong risk management systems could increase their capital market exposure limit. Following this, a few private sector banks, such as HDFC Bank and ICICI Bank, are understood to have approached the regulator for a little extra leeway in terms of exposure to capital markets.

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