The Hindu Business Line : More leeway for banks in capital market exposure

The pathway
Bank boards can adopt a lower ceiling against the permissible limit of 40 per cent.
Loans against shares, convertible bonds & mutual fund to individuals should not exceed Rs 10 lakh per individual.

Mumbai , Dec. 16

Banks' investments in their own subsidiaries, joint ventures and sponsored Regional Rural Banks would be excluded for calculating capital market exposure of banks, said the Reserve Bank of India in a notification issued on Friday.

The guidelines will come into effect from April 1, 2007.

Exposure

Even though it offers banks slightly more space, the general restrictions continue to be stringent as the RBI has restricted a bank's aggregate capital market exposure to 40 per cent of its net worth on a solo and consolidated basis and the direct capital market exposure to 20 per cent of its consolidated networth.

Aggregate exposure to capital market would include direct investment in equity shares, convertible bonds, convertible debentures, units of equity-oriented mutual funds, advances against shares, bonds, debentures or other securities to individuals for investment in shares, including IPOs or ESOPs or for other purposes, secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market makers, loans sanctioned to corporates against shares or bonds or debentures, bridge loans to companies against expected equity flows or issues and all exposure to Venture Capital Funds.

Lower ceiling

The RBI has allowed bank boards to adopt a lower ceiling against the permissible limit of 40 per cent for aggregate and 20 per cent for direct exposure. This should be in keeping with the overall risk profile and corporate strategy of the bank, said the RBI.

It has also said banks having internal controls and robust risk management systems can approach the RBI for higher exposure limits.

Loans against shares and convertible bonds and mutual fund units to individuals from the entire banking system should not exceed Rs 10 lakh per individual and Rs 20 lakh, if the securities are in demat form.

Difficult to enforce

Bank officials feel the enforcement of this particular provision would be difficult, as banks are only required to obtain a declaration from the borrower indicating details of loans availed from other banks. This information, they feel, could be tampered with.

"It will be difficult for banks to cross check instances of multiple exposure. As a banker, if I am satisfied with what the borrower says, I can give the loan," said a senior official from a public sector bank.

At present, there are no guidelines for monitoring banks' intra-day exposure to capital markets, which are inherently risky. The board of each bank should evolve a policy for fixing these limits and put in place an appropriate system to monitor them on an ongoing basis, said the RBI.

Banks with higher exposures will have to approach the RBI with a trimming plan, the central bank said.

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