Search the Internet          Tips  Sites: Finance, Investment

Bank exposure cap won't hit brokers

BS Markets Bureau

The RBI limit on banks' total exposure to capital markets, at five per cent of the total advance of the previous year, is unlikely to hit brokers.

Brokers draw support from the banking system either as funded loans and advances or through non-fund guarantees. While banks are expected to be cautious in their direct funding to brokers, the latter may still not find the five per cent cap too stringent.

The total outstanding bank guarantees, broking sources say, even at peak level of business did not exceed Rs 40 billion, which is much less than the five per cent cap or an aggregated Rs 260 billion.

Even at the peak, when gross exposure per member or per card was Rs 400 million, bank guarantees, generally accepted at half the total exposure in the form of initial deposit by the broker, worked out to only Rs 200 million per member.

Considering that there would be 1,200 brokers using the full exposure when the entire secondary market turnover was at the peak of Rs 120 billion per day, the maximum outstanding bank guarantees would be at Rs 40 billion.

"Currently, volumes have dropped sharply and the entire market turnover (of all exchanges combined) is hardly Rs 40 billion. Moreover, with the cash component in the form of guarantee, presently hiked at 70 per cent, the bank guarantees constitute only 30 per cent, thus bringing down the outstanding bank guarantees to Rs 12 billion," sources explained.

With the current market turmoil, where circular trading has come to a halt along with ban on short sales, the volumes have dropped bringing down the stock prices to ridiculous levels. This has forced many of them to liquidate their bank guarantees to meet cash obligations, brokers say.

However, there was a word of caution in case of individual banks who may have exhausted their prescribed capital market exposure limit. But even in this case, the brokers can have alternative arrangement with other banks, sources say.

Even at a curtailed capital market exposure limit of banks, the total available funds at the disposal for such activities would be roughly around Rs 260 billion, which turns out to be much higher than the bank guarantees needed even at record volumes in a bull run.

Powered by

ALSO READ:
The Rediff-Business Standard Special
The Budget 2001-2002 Special
Money
Business News

Tell us what you think of this report