Mumbai, Sept 3: The joint committee comprising senior officials from the Reserve Bank of India and the Securities Exchange Board of India has recommended that the ceiling on exposure of banks in equities, convertible debentures, and mutual funds (MFs) be increased to five per cent of the total outstanding advances from five per cent of the incremental deposits.The committee has also recommended that banks which do not have in-house expertise in capital market be given the flexibility to invest up to two-thirds of the eligible amount in Unit Trust Higher cap on banks' exposure to equities mooted of India and Sebi-approved mutual funds. The balance amounts may be deployed in listed stocks directly by the banks.The committee had been in pursuance of the monetary and credit policy for the year 2001-2001 with the objective of evolving operative guidelines for a transparent and stable system of banks' investment and financing of equities. It held discussions with chief executives of select banks, which have an exposure to the capital market, and also obtained feedback from other participants. The committee gave its report on August 30, and the RBI is now examining its recommendations.
The rationale for the new ceiling -- five per cent of total outstanding advances -- follows from the committee's view that "the existing norm of five per cent of incremental deposits does not reflect the shift in the asset portfolio of banks from credit to investment".
On initial public offerings (IPOs), the committee has said that the terms and conditions should be the same as those applicable to advances against shares to individuals. While the maximum amount to individuals for advances against shares will continue to have a ceiling of Rs 10 lakh, corporates are not to be given advances for IPOs. And banks are also not give like advances to NBFCs to on-lend the same to individuals for subscribing to IPOs.
Further, finance extended by a bank for an IPO should be reckoned as exposure to the capital market. There is also no change as far as margins on loans against shares to individuals are concerned.
The committee has recommended a margin of 25 per cent, inclusive of a cash-margin, for issue of gurantees on behalf of brokers. The maximum amount in margins is to be left to the discretion of individual bank boards."The recommendation is made considering it prudent for banks to maintain adequate margin, which will ensure that brokers do not build up substantially leveraged position and at the same time, banks can minimise their risks", the RBI said.
Excluded from banks' exposure-ceiling to capital markets will be advances against collateral of shares; advances granted for personal loans against security of shares; and credit substitutes like commercial paper.
Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.