RBI move to boost depository

MUMBAI, April 29: The true utility of a product such as a loan against shares, an effective overdraft facility, is set to come to the fore f...

MUMBAI, April 29: The true utility of a product such as a loan against shares, an effective overdraft facility, is set to come to the fore following the Reserve Bank of India8217;s move to make it clear that it is in favour of banks lending against dematerialised shares. Even though the apex bank has not made this mandatory, it has hiked the limit of loan against shares provided to an individual to Rs 20 lakh from the current level of Rs 10 lakh, if the loan is sought against demat shares .

More importantly, the minimum margin prescribed for extending these loans has been lowered to half ie, 25 per cent in the event of the shares being in a demat form.

Currently, HDFC Bank, Global Trust Bank, IndusInd Bank and Bank of India charge a lower rate of interest from clients for advances made against demat shares. Bank of India, which offers a 0.25 per cent benefit, has decided to review the interest structure to make it more favourable at its assets and liabilities committee meeting slated for May 5, saidsources.

Bankers said that the RBI measure would lead to an effective overdraft facility being created for clients. quot;What will happen in the demat mode is that a client will not need to take the shares to the bank to pledge. The bank on its part will be sure of a clean title. A bank will be able to shuffle the shares from the demat account and the lien account of the client with speed and safety,quot; said a top official at Global Trust Bank.

In other words, a client will need to enter into an agreement with a bank which in turn will be able to provide him with overdraft by keeping a pledge of his shares. The bank will provide the overdraft against the pledged shares in the demat mode through the pledging module of the depository. The RBI has already clarified that in case of shares being in demat mode they do not need to be transferred in the bank8217;s name. This simplifies the entire procedure for a bank as well as for an individual who needs funds but is not keen on selling his portfolio.

HDFC Bank hasalready outlined plans for starting such a facility and may banks are realising the value of giving loans against demat shares. quot;Earlier, some banks were charging lower interest. This was an incentive. Now the limit that can be borrowed has been hiked. The margin to be payed has been lowered by half. There is no reason why an individual is not going to be keen to dematerialise his holdings and get the benefit of seeking loans against pledge of shares,quot; said National Securities Depository Ltd managing direcor CB Bhave.

quot;The RBI has always been a step forward. When we asked them to do away with the clause of a bank transferring shares to their name if the shares are in a demat mode, they not only agreed to this but went a step forward and asked banks to consider becoming depository participants with the depository. The next step would be to ask banks to only extend loans against demat shares,quot; said Bhave.