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Tuesday, Oct 29, 2002

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RBI committee calls for ban on securities trading by LABs

BL Research Bureau

CHENNAI, Oct. 28

LOCAL Area Banks (LABs) should be prohibited from trading in Government securities, a group of banking specialists appointed by the Reserve Bank of India (RBI) to review the functioning of LABs has recommended.

In a report submitted to the RBI and made available by the latter at its website recently, the expert committee has observed that barring one, all other LABs have traded heavily in Government securities routed largely through one single broker and in the case of one LAB, these transactions were not carried out on a `delivery' versus `payment' basis. The group feels that LABs, given their remote location (from the financial market, that is) are `likely to fall a prey to the machinations of other players in the market'.

The committee has further recommended that LABs be asked to achieve a networth of Rs 25 crore over the next five years as in its view, the relatively small scope of their operations renders them inherently unviable. As a measure of additional safety the committee has also recommended that LABs maintain a capital adequacy ratio (the proportion of shareholder funds that must be maintained relative to the total value of its assets) of 15 per cent.

The `review group' has proposed that LABs be extended refinance facilities from SIDBI and Nabard — the apex institutions set up by the RBI to catalyse the flow of funds to small enterprises and agricultural sector, respectively. The LABs are currently denied this facility as they are not classified as `scheduled banks'. On the other hand, these institutions of refinance have been mandated by their charter to lend only to the `scheduled' banks. In the event, a policy change allowing LABs the refinance window from Nabard and SIDBI the committee feels, would open up a source of low-cost funds and improve their viability.

The handful of LABs currently in business have not made any impact on the local community judged by traditional parameters of commercial banking, the committee has said. The total volume of business as of March 2002, stood at Rs 153 crore from a total of 25 branches across the four LABs in operation, it has noted.

The committee has further recommended that till the existing LABs are put on a sound financial basis, no fresh licences be issued for starting a Local Area Bank. The committee comprised Mr G. Ramachandran, Former Finance Secretary, Government of India, Mr M.G. Bhide, Chairman, National Institute of Bank Management. They were assisted by Mr A.V. Sardesai as a Member Secretary.

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