The Reserve Bank of India has directed banks to review their risk management systems related to capital market exposure and exposure to broking entities and market makers.
The central bank has said that banks should immediately identify the gaps in compliance and initiate appropriate steps.
Even though the central bank has not cited any reason for reiterating its earlier stance on banks' capital market exposure, industry sources said there could be some triggers which prompted the RBI to come out with a fresh directive.
"Some banks may have breached the norms. The regulator does not want to take any chances particularly now when the bank stocks are on a roll. No bank can even indirectly encourage brokers to pump up its own stock," a source said.
The RBI had earlier set a ceiling of 5 per cent, of the bank's outstanding advances as on March 31 of the previous year, for investment in shares on both fund-based and non fund-based exposures to the market.
The outstanding advances also includes commercial paper.
The non fund-based facilities and investment by banks in non-convertible debentures and other similar instruments also cannot be included in computing the total outstanding advances of the bank.
Some new private banks such as HDFC Bank, ICICI Bank, IDBI Bank and foreign banks such as StanChart and Citibank are very aggressive on the capital market portfolio. One of the institution-backed private bank has been hovering around the 5 per cent mark for some time now.
Industry observers felt that the central bank would not like to have a problem as they had faced during the Ketan Parekh scam when some private banks were overexposed on the capital markets.
RBI said that the May 2001 guidelines were issued to address the risks to banks that could arise on account of inadequacy of margins or the inability of borrowers to meet their repayment/ interest obligations owing volatility in share prices or other related reasons.
These guidelines included the ceiling on overall exposure to capital market, the ceiling on direct investment in shares etc, prudential limits on advances to individuals, financing of initial public offerings, margins on advances against shares/ issue of guarantees.
Banks were also advised by the RBI to put in place appropriate sub-ceilings, within the overall ceiling prescribed for capital market exposures, on exposure to all stockbrokers and market makers, and also to any single stock broking entity including its associates/inter-connected companies.