RBI norms allow higher bank exposure in stocks

RBI norms allow higher bank exposure in stocks
ENS ECONOMIC BUREAU

MUMBAI, SEPt 21: The Reserve Bank of India (RBI) in its draft guidelines on banks financing and investments in equities on Thursday said that banks can invest up to five per cent of their outstanding credit in capital markets -- shares, convertible debentures and units of equity mutual funds (MFs). As of now, banks invest only up to five per cent of their annual incremental deposits in capital markets.

In a late evening press statement, the central bank said that the draft guidelines followed talks that RBI deputy governor, SP Talwar, had with the chief executives of various banks on the joint Sebi-RBI standing technical committee on bank financing of equities. The Sebi-RBI joint committee had submitted its recommendations on August 2.

The RBI agreed with the recommendation of the Reserve Bank of India-Securities Exchange Board of India committee, that the ceiling prescribed for banks investment in shares and convertible debentures (CDs) should be related to outstanding advances and not to incremental deposits of the previous year.

The RBI also said that "the draft guidelines have clarified that the ceilings for investments in shares is not mandatory. The board of directors of banks shall formulate their policy on exposure to the capital market. Similarly, the extent to which may invest in shares directly or through the Unit Trust of India and Sebi approved other diversified MFs with a good track record will be as per the investment policy approved by the Board of Directors of each bank". Banks will also have to disclose their investment in shares in their balance sheets like in the case of advance against shares.

Other measures that find mention in the draft guidelines issued today are that the terms and conditions for bank funding of initial public offerings (IPOs) should be the same as those applicable to advances against shares to individuals. The maximum amount of advance extended to an individual against IPOs should be Rs 10 lakh, as applicable to advances against physical shares. Forming part of the draft guidelines is also a prohibition on corporates from getting advances for IPOs and a bar on banks from extending finance to non-banking finance companies (NBFCs) for on-lending to individuals for IPOs.

Finance extended by a bank for initial public offering should be reckoned as an exposure to the capital markets, the committee, which submitted its report to RBI on August 2, said. The board of directors of banks' may lay down a prudential ceiling on their aggregate exposure to capital market, keeping in view the overall risk profile.

The advances against collateral security of shares and advances to individuals for personal purposes like education, housing and consumption may be excluded from reckoning banks' aggregate exposure to the capital market.

Credit substitutes like commercial paper, non-convertible debentures may not be reckoned as part of credit portfolio for arriving at the banks' exposure to the market, the committee recommended.

On the issue of guarantees on behalf of brokers, the RBI appointed committee said a minimum margin of 25 per cent inclusive of cash margin should be obtained by the banks. The banks may, at their discretion, obtain a margin higher than 25 per cent as per the policy approved by the board of directors.

The members of the Sebi-RBI panel were RBI executive director GP Muniappan, RBI chief general manager-in-charge (DBOD) A Ghosh, Sebi executive director Pratip Kar and Sebi senior executive director O P Gahrotra.

RBI's capital moves
*Banks can invest up to 5% of outstanding credit in shares, convertible debentures and MFs
*Ceiling not mandatory and bank-Boards are to formulate policy on exposure to capital market
* Banks to disclose their investment in shares in balance sheets

* Terms for bank funding of IPOs will be the same as advances against shares to individuals; maximum extended to individuals against IPOs will be Rs 10 lakh.
* Bar on corporates from getting advances for IPOs & banks from extending finance to NBFCs for on-lending to individuals for IPOs.