The Hindu Business Line : Banks' capital market exposure to go up Rs 1,000 cr: Reddy<br>`It's rationalisation not restriction'

Money & Banking - Credit Market
Markets - Stock Markets

Banks' capital market exposure to go up Rs 1,000 cr: Reddy
`It's rationalisation not restriction'

Our Bureau

Mumbai , Oct. 25

THE Reserve Bank of India's decision to rationalise banks' exposure limit to capital markets will give them more headroom, to the tune of Rs 1,000 crore, according to Dr Y.V. Reddy, Governor, RBI.

Explaining the revision in capital market exposure norms for banks as announced in the central bank's mid-term review of the annual policy statement 2005-06 announced today, Dr Reddy said the idea was to ensure that the new limit was not less than the existing limit.

"Actually it is not limiting the banks' exposure to the capital market. The way it has been fixed it gives a lot of headroom... Basically we want to ensure that it is non-disruptive. That is why we call it rationalisation; otherwise we would have called it restriction," he told Business Line.

The RBI has proposed that a bank's aggregate capital market exposure should be limited to 40 per cent of its net worth, on a solo and consolidated basis; to modify its consolidated direct exposure to 20 per cent of its consolidated net worth and to simplify and rationalise exemptions.

When asked what triggered the RBI decision, he said: "There is no trigger, historically when it started, idea was to do it in a small way; it was a proportion of advances. Whereas, logically it should have been linked to net worth. This is all that has happened. The change in the base for banks' capital market exposure from 5 per cent of advances to 40 per cent of net worth gives a headroom for additional exposure of around Rs 1,000 crore for the system as a whole."

Since the actual capital market exposure of banks as on August-end was 1.8 per cent of advances or 14 per cent of net worth, the leeway available for operational purposes is considerable, he said.

There is only one bank whose market exposure exceeds 40 per cent of net worth; however, those banks wanting higher limits will be permitted to pursue it subject to them satisfying RBI about its risk management systems.

Even those banks exceeding 40 per cent exposure, will be either allowed to bring it down below 40 per cent or retain it provided they have adequate risk mitigating system.

This is a logically structured system, Dr Reddy said.

There are only two banks - former development financial institutions - whose direct equity exposure has exceeded the 20 per cent limit; they have been given certain exemptions for their legacy holdings, he said.

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