In a major relief for broking firms and corporates, the Reserve Bank of India has said that the ceiling on bank loans and advances against shares and debentures will apply to only "individuals" and not "single borrowers." This means that there will not be any squeeze on bank advances to broking firms and corporates.
Any individual can now borrow from the banking system against security of such investments of up to Rs 10 lakh (Rs 1 million) if the security is held in physical form and of up to Rs 20 lakh (Rs 2 million) if it is in the demat form.
The central bank has kept the overall ceiling on a bank's aggregate capital market exposure to 40 per cent of its networth.
In its final guidelines on banks' exposure to capital markets issued today, the RBI has also taken out intra-day exposure and guarantees from the ceiling on the total capital market exposure.
The guidelines have made the concept of networth broader by bringing under it the Investment Fluctuation Reserves, a corpus created to protect banks against changes in the interest rate environment. However, no general or specific provisions should be included in the computation of networth.
The new norms will come into effect on April 1, 2007, as against January 1, 2007, stipulated in the draft guidelines.
Banks can extend finance to employees for purchasing shares of their own companies under the employee stock option programme, to the extent of 90 per cent of the purchase price of shares or Rs 20 lakh, whichever is lower.
But banks are barred from extending financial assistance to its employees or employee trusts to purchase banks' own shares under ESOP\public offer or through secondary markets.
Banks are free to provide credit facilities to stockbrokers and market makers on the basis of their commercial judgment, within the policy framework approved by their boards.
Each bank should fix sub-ceilings for stockbrokers and market makers within the overall limit of 40 per cent of their networth on March 31 of the previous year.
It will help to avoid any nexus emerging between interconnected stockbroking entities and banks.
Further, banks should not extend credit facilities directly or indirectly to stockbrokers for arbitrage operations in stock exchanges.
Such banks whose exposure to capital market on solo and/or consolidated basis is in excess of the ceilings should approach the RBI with a plan for adhering to the exposure ceilings prescribed.