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RBI, Sebi draft tighter rules for bank investments

Officials from the Reserve Bank of India and capital market watchdog Securities and Exchange Board of India have recommended tighter norms to banks over their exposure to capital markets, the RBI said on Thursday.

A report by a joint group said banks would have to include advances to share brokers under an overall ceiling under which banks' investments in equity shares, convertible debentures and units of mutual funds are limited to five percent of their total advances for the previous financial year.

Earlier banks were free to fix their own prudential ceilings for loans to brokers and these did not fall under the five percent ceiling.

The report has also recommended a hike in the margins on advances against shares and debentures to stock brokers to 50 per cent from the current 25 per cent.

Indian financial markets were recently rocked by a share market scandal in which bank funds were allegedly misused to ramp up share prices.

One bank, the Madhavpura Mercantile Cooperative Bank, is facing possible liquidation after lending excessively to share brokers and being unable to recover its advances in a slumping market as the collateral, mainly shares, have lost value.

The benchmark Bombay exchange index has lost nearly 29 per cent from a high hit on March 1, a day after a widely acclaimed markets-friendly budget was presented to parliament.

Share prices have tumbled on a combination of bear hammering, allegations of shady deals, insider trading and price manipulation.

Sentiment has also been hit by the unearthing of a scam involving bankers and brokers, which involved the alleged misuse of bank funds to ramp up share prices.

Some banks, which had business dealings with Madhavpura, are facing potential losses.

Domestic media has also reported that some banks who issued guarantees on behalf of brokers, may be facing losses as the shares that they hold as collateral have lost value.

The report says that the total investments in shares of 101 scheduled commercial banks aggregated Rs 87.71 billion as on January 31, 2001 and constituted 1.97 per cent of outstanding domestic advances as on March 31, 2000 and were well within the five per cent ceiling.

But a few new private sector banks and foreign banks had made huge advances with eight new private sector banks having made advances to the tune of 15.30 per cent of the total advances to capital markets.

The RBI said the report's recommendations were on its Web site (www.rbi.org.in) and invited the public to make suggestions on the report. It would issue its final guidelines in early May 2001, it said.

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