Funding of IPOs by banks, said to be in the region of about Rs 3,000 crore, comes against the backdrop of no clear-cut guidelines prescribed by the Reserve Bank of India (RBI) to regulate this area of retail lending.Likely investor defaults may snowball into a major crisis for banks as shares of some of the newly listed companies, pledged as collateral have eroded in value, which may not allow recovery of dues.

``The frenzied rush among investors to subscribe to IPOs and these issues getting badly hammered by the market has left the investor more than anyone else in a sorry state,'' said an market source.

Tempted by the bull run in the stockmarkets, commercial banks-particularly private and foreign-went overboard earlier this year in extending loans to investors for funding IPOs. To top it, the absence of standard industry norms allowed banks to set their own rules while funding IPOs and lending against both physical and demat shares.

The co-operative banks were not far behind in wooing investors even at the cost of bringing down the lending margins the below acceptable levels. The craze for funding IPO issues was based on the singular assumption of the bull rally in the markets sustaining at levels during that period.

``Though the large banks have their risk management system in place for managing defaults by investors, the smaller ones are expected to fall flat on their faces in the event of a crisis,'' the retail head of a private bank said. Many companies that went in for an IPO this year have listed at a huge discount in stock exchanges.

At present, there is no RBI stipulation on IPO financing and banks are fixing margins and exposure to IPOs based on their own internal norms set up by the respective boards. As a result, some banks are extending IPO loans at lending margins as low as 10 per cent as compared to 25-50 per cent maintained while lending against physical or demat shares.

``Technically, IPO financing is another form of loan against shares, with the difference that the pledged shares in case of IPOs materialise only after allotment,'' the senior banker said.

Active financing of IPOs by banks has been the prime factor in many of the new issues hitting the primary market getting oversubscribed several times over.

Banks active in the area over-extended themselves, riding high on the stock market boom. The recent meltdown has shaken them as this poses a problem for liquidating the allotted shares, held as collateral. The shares applied for by investors are kept in lien with the bank, with the refund order also accruing to the bank.

Investors are at the receiving end of the whole crisis. Besides repaying the loans borrowed at interest rates between 18 and 25 per cent, they are finding it difficult to offload shares at a gain.

The RBI has referred the IPO financing issue to the standing committee on co-ordination between RBI and Sebi. ``The committee will consider the desirability of having an aggregate exposure on advances to individuals, corporates, brokers and others against shares and IPOs,'' the RBI said in its credit policy.