The Hindu Business Line : Banks may get more capital market exposure

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Banks may get more capital market exposure

Our Bureau

Mumbai , Nov. 17

Banks may get more headroom for their capital market exposure when the modified Reserve Bank of India guidelines come into force from January 2007.

A draft circular issued by the RBI on Friday said the aggregated capital market exposure of banks can go up to 40 per cent of their net worth on both solo and consolidated bases.

The RBI had mentioned this measure in the mid-term review of its annual policy statement for 2005-2006.

However, banks' direct capital market exposure will be limited to 20 per cent of their individual net worth. Currently, banks' capital market exposure is restricted at 5 per cent of their total outstanding advances.

Going by the banks exposure to this sensitive area as on March 31, 2006 all banks have large additional legroom for capital market exposure.

As on March 31, PSU banks' exposure to capital markets amounted to Rs 13,274 crore. The modified guidelines will allow them to go up to Rs 46,006 crore.

Foreign banks' exposure to the capital market is Rs 2,243 core against a potential Rs 9,714 crore. For old private banks it is Rs 1,077 crore (Rs 3,868 crore) and for new private banks, Rs 5,290 crore, as against their potential limit of Rs 13,656 crore.

Within the overall new ceiling of 40 per cent, banks' direct investment in shares, convertible bonds debentures, units of equity-oriented mutual funds and all exposures to venture capital funds should not exceed 20 per cent of their net worth, the RBI said.

The guidelines exempt investments in the banks' own subsidiaries, joint ventures, sponsored Regional Rural Banks, and investments in shares and instruments issued by National Securities Depository Ltd, Central Depository Services (India) Ltd, National Stock Exchange, Clearing Corporation of India, Credit Information Bureau (India) Ltd, Multi Commodity Exchange of India Ltd, National Commodity and Derivatives Exchange Ltd and National Multi-Commodity Exchange of India Ltd from capital market exposure. However, upon the listing of these entities, these investments would also constitute capital market exposure.

Banks having sound internal controls and risk management systems can approach the RBI for higher limits with details of their exposure, the guidelines said. Since, there are no guidelines for monitoring banks' intra-day exposure to the capital, the RBI has asked the Boards of banks to evolve a policy for the same.

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