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HDFC Bank, the largest private sector lender, has informed stock and commodity market brokers that it will not grant short-term loans (STL) for margin purpose, sources close to the development told Business Line . The move comes in the wake of the ongoing scrutiny by market regulator SEBI and Reserve Bank of India (RBI) with regard to the ‘funded’ fixed deposit (FD) that brokers used to avail trading margin.
A few private sector banks gave brokers STL based on shares and property as collateral. However, on a collateral worth ₹100, the banks issued STL of ₹50, and the rest ₹50 was granted as ‘funded’ fixed deposit (FD). The broker used the ₹50 worth of STL to further avail higher amount of bank guarantee (BG), which, along with ‘funded’ FD, was deposited with the clearing corporation (CCs) of stock exchanges to avail trading limits. Brokers have to put up initial margin with CCs to avail trading limit, which are accepted partly as cash, BG and FD. On August 2, Business Line had reported that SEBI wanted to know the extent of ‘funded’ FDs that CCs had accepted. Reportedly, the RBI, too, had sought details. The catch in the collateral is that a portion of it could belong to the client of the broker and may not be his own.
Liquidity crunch
Brokers fear ballooning of liquidity crunch in the market if some of the banks refuse to honour past FDs that were issued for margin.
“Any bank not honouring its FDs on technical grounds is a worrisome development for the capital market participants” said Uttam Bagri, Chairman, Bombay Stock Exchange Brokers Forum.
This week, HDFC Bank and Edelweiss Custodial Services Ltd decided to settle ₹100 crore worth of margin-related collateral issues through arbitration process. Brokerage house IndiaNivesh had suffered mark-to-market losses, which was funded by Edelweiss Custodial Services Ltd. Edelweiss was covered with STL, which was available for the credit balances of the ‘clients.’
IndiaNivesh has announced that the amount would “be enough to cover the creditors”. The problem started when HDFC Bank declined to honour the FD receipts issued by it as IndiaNivesh’s collateral pledged with Edelweiss, which was acting as the clearing member. Edelweiss claimed that the FDRs issued by HDFC Bank were pledged by IndiaNivesh as collateral for the entire trade, while HDFC Bank claimed that these were meant only as margin and not for mark-to-market or M2M losses.
The National Stock Exchange has now hiked the limit of BGs that it will accept from brokers.
HDFC Bank did not respond to an email query. However, a source close to the bank, said they are still ‘evaluating’ the STL for margin purpose and that a final decision has not been taken.
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