RBI asks banks to hike margins for stock funding

With the stock markets going through the roof, the banking regulator RBI has asked banks to hike margins from 40 to 50 per cent with immedia...

With the stock markets going through the roof, the banking regulator RBI has asked banks to hike margins from 40 to 50 per cent with immediate effect on advances against shares, financing of initial public offerings (IPOs) and guarantees to control their exposure to capital market.

The banks should also raise the minimum cash margins for the guarantees issued for capital market operations from 20 per cent to 25 per cent, an RBI release said here. Clearly, the RBI is worried over easy bank funds finding their way to the stock markets. According to analysts, the increase in the margins follows the surge in the stock market activity in recent times with the Sensex hurtling past the 6,000-mark.

The 50 per cent margin would apply to fresh advances and guarantees issued for capital market operations. The existing advances and guarantees may continue at the earlier margins until they come up for renewal, the release added. It may be recalled that bank funds were illegally diverted to the stock markets in 1992 and 2000. Harshad Mehta used the banking system to ramp up stocks in 1991-92 and the market collapsed later. In 2000, Ketan Parekh used Madhvapura Mercantile Co-operative Bank and Bank of India to divert funds and rig up stocks. It was also found that several banks, mainly Global Trust Bank, overshot their capital market exposure in the 2000 bull run. The RBI later came out with stringent guidelines to plug the loopholes. In both the bull phases, banks suffered due to diversion of funds.

Story continues below this ad

The Reserve Bank of India had fixed a ceiling of 5 per cent (of total advances) as the total exposure of a bank to stock markets in all forms as per the proposed guidelines.

The ceiling would cover direct investment by banks in equity shares, convertible debentures (CDs), and units of equity oriented mutual funds, advances against shares and debentures and guarantees issued on behalf of brokers.

As a safeguard to prevent any ‘nexus’ from emerging, the RBI had proposed that there should be a clear separation of responsibilities for making decisions about actual advances against shares/investments in shares and surveillance & monitoring of actual advances/investments in shares by banks.

In Odisha, Modi mounts ‘loot tantra-vs-bachat utsav’ attack on Congress over GST

India1 hr ago

Prime Minister Narendra Modi Saturday hailed the revised Goods and Services Tax (GST) structures, saying the era of “double bachat (saving) and double kamai (income)” has arrived under the Bharatiya Janata Party rule. Addressing the ' Namo Yuva Samabesh' in Jharsuguda, Modi accused the Congress of indulging in “loot tantra (tactics)” while in power.

View all shorts

Live Blog

PHOTOS