MUMBAI, SEPT 3: In a move which is likely to raise eyebrows, the joint committee comprising senior officials from the Reserve Bank of India (RBI) and the Securities Exchange Board of India (Sebi) has recommended that the ceiling on bank's exposure in equities, convertible debentures and mutual funds (MFs) should be increased to five per cent of total outstanding advances from five per cent of incremental deposits. The rationale for the new ceiling - five per cent of total outstanding advances - follows the committee's view that "the existing norm of five per cent of incremental deposits did not reflect the the shift in the asset portfolio of banks from credit to investment". This means if the proposal is accepted, banks will be able to divert more funds to the stock markets. ``Regulators should discuss whether this is a prudent proposal. If allowed, it may lead to another scam. The securities scam of 1992 was the result of unbridled diversion of bank funds to the stock markets,'' said a banker. 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 of India and Sebi-approved mutual funds. The balance amounts may be deployed in listed stocks directly by the banks. The RBI-Sebi committee was set up 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. The committee held discussions with chief executives of select banks, which have an exposure to the capital markets and also obtained feedback from other participants. The committee gave its report on August 30, and the RBI is now examining its recommendations. 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 should not extend finance NBFCs in any form for on-lending to individuals to subscribe 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 guarantees on behalf of brokers. The maximum amount in margins is to be left to 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-Sebi panel 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. The joint committee was set up two months ago following allegations that banks were going overboard in extending finance to subscribe to IPOs of companies. There were also allegations that some brokers were misusing bank funds to finance their share purchases. According to bankers, the panel's proposal for higher exposure (linked to outstanding advances) is likely to boost the stock market. ``But it may turn out to be a cure worse than the disease,'' bankers said.RBI-SEBI panel's proposals* New ceiling to be higher at 5% of bank's outstanding advances, up from 5% of incremental deposits.* Banks with no in-house expertise in capital market be given flexibility to invest up to two-thirds of the eligible amount in UTI and Sebi-approved MFs. Balance amounts may be deployed in listed stock directly by the banks.* Corporates should not to be given advances for IPOs.* NBFCs should not be give advances for further onlending to individuals for IPOs.* Finance extended for IPOs be deemed as exposure to capital markets.* Minimum margin of 25%, inclusive of a cash-margin for brokers; maximum to be decided by a bank's board.* Bank boards to decide ceiling on exposure to capital market.
