RBI to tighten norms for bank VCs

The Reserve Bank of India is likely to come up with capital adequacy norms for bank-sponsored venture capital firms to prevent reputational risk to their promoters. In addition, RBI wants banks to rebrand their VC funds in a manner that they appear as subsidiaries and not a part of the bank.

In its annual report, the central bank had said that it would lay down a risk management and capital adequacy framework for bank-sponsored private pools of capital.

"RBI is working on capital adequacy norms for VCs floated by banks. The central bank wants to emphasise on branding in way that the funds look like subsidiaries. At present, investors have a feeling that they are investing in the bank and not in the fund," said Amitabh Chaturvedi, chief executive officer, Dhanalakshmi Bank.

He said the move had taken some time but expected the regulator's approval by November. After this, the bank will apply to the Securities Exchange Board of India. It plans to float the fund by the first quarter of the next financial year.

Recently, private sector lender Dhanalakshmi Bank and public sector Indian Overseas Bank applied to RBI for launching a VC fund. Public sector lender IDBI Bank's application has been pending for some time. It plans to raise Rs 1,500 crore (Rs 15 billion) for its PE fund.

Bankers said one of the ways RBI might ensure tighter risk management was by increasing risk weights. Investments in VCs carry a 150 per cent risk weight. This figure is 125 per cent for mutual funds and 100 per cent for real estate.

Risk weight is the portion of capital banks have to set aside under provisioning norms. According to the prudential norms on risk weight, banks have to hold capital in proportion to the risk of their various loans or investments. This is aimed at ensuring sufficient resources to cover any possible losses.

Venture capitalists, however, say that investments in real estate and mutual funds are riskier than investments in venture funds as they carry out proper due diligence before investing in any company whereas mutual funds manage a corpus of over Rs 1,000 crore (Rs 10 billion) with a paid-up capital of just Rs 10 crore (Rs 100 million).

Investments in VCs come under the banks' capital market exposure. The exposure of a bank to capital markets cannot be more than 40 per cent of its net worth. According to RBI, within this overall ceiling, a bank's direct investments in VCs, both registered and unregistered, should not exceed 20 per cent of its net worth.

Existing PEs will also have to comply with the new norms.

Canbank VC is looking to raise a Rs 500-crore (Rs 5-billion) fund by the end of this financial year. Last year, it deferred its plan to raise funds by almost a year as markets were sluggish. "Our risk weight is already too high for investment in VCs. Canara Bank will invest around 20 per cent in the fund. We plan to raise the money in another three months," said a senior executive managing the fund.

Among other existing funds is Axis Private Equity, floated by the third-largest private sector lender, Axis Bank. The firm, however, feels that any further tightening will be a cause for concern for new funds.

"Further tightening of norms for banks-sponsored PEs will be a cause for concern for new funds. We have got commitments from Axis Bank and so it will not be a concern for us. Private equity investments are done after considerable due diligence and are therefore less risky," said Axis Private Equity CEO Alok Gupta.