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Bankers fearful of RBI-Sebi panel's counsel

George Smith Alexander

The proposed recommendations of the RBI-Sebi committee on banks' investments in shares may put a spanner in the government's divestment programme, bankers said. Even primary market flotations may grind to a halt if banks tighten their pursestrings for retail investors intending to raise IPO financing, they added.

The government's divestment process could get stuck if bankers do not provide adequate funding for retail clients willing to take a shot at the divested shares. As it is, the committee has called for a tough 50 per cent margin on such financing.

Additionally, if banks themsleves take part in the divestment process, their exposure will be carved out of the 5 per cent overall limit. This wil further choke availability of resources for retail funding and broker financing.

Bankers said given the choice between lending retail and to brokers, they would always prefer the latter for the simple reason that such loans are large in value. This reduces the per unit cost of monitoring wheraes retail lending of relatively small amounts increases not only the cost of monitoring, but also of supervision and follow-up.

Bankers said that though on an aggregated level, the total availability of capital market related finance could be in the region of Rs 260 billion, the fact is that only a handful of banks are active in the capital market. "The actual availability of funds, therefore, is much less than the aggregated figure," a top banker said.

The banks that are aggressive in the capital market sector are the new private sector banks, some of the foreign banks (which are heavily into retail) and a clutch of public sector banks. But the active public and private sector banks are the settlement banks, which gives them unique insights into the market process, market observers pointed out. They added that since these banks have access to superior data, they can manage their risk profile better than the other banks. Already banks are reluctant to give working capital and overdraft facility to the brokers making it more difficult for the brokers to function.

In the private sector --HDFC Bank, Global Trust Bank, Centurion Bank,ICICI Bank, IndusInd Bank-- and in the public sector-- Bank of India, Canara Bank, Punjab and Sind Bank and United Bank-- are the settlement banks to the major stock exchanges.

According to senior public sector banker, PSBs avoid lending to the stock market as they lack the market expertise. No one has bothered to build the market knowledge. Bankers add that the in the current level of market inactivity brokers may not feel the need for funds but if the market improves then the need for funds will go up.

Also with the cap of 5 per cent of the total advances of the previous year these banks will now have to make a decision on lending to the retail population or to the brokers. The loans to the brokers attract a lower rate of interest of around 13.5 to 14 per cent as there is cut throat competition among the banks to net the bigger brokers. Also the loans to the brokers will have to be under a sub-ceiling of the overall exposure to the capital market. The loans against shares in case of personal loans to the retail population offer a high rate of interest starting from 16 to 19 per cent.

Bankers are divided on the matter of lending to the retail population or to the stockbrokers. According to a senior private sector banker though the rate of interest is higher on the retail loans it would be better to give loans to the brokers as it would be difficult to manage a lot of micro-credit.

The loans to the retail population will be kept at a bare minimum. Around 1.5 per cent of the advances would go to the investments with a major chunk to the funding of brokers. However even with the remaining funds the quantum of money given to the brokers would be comparatively less than that what would be actually required.

With the subdued level of activity in the stock markets brokers may not have the need of funds at present. However market observers feel that brokers will find it difficult to get funds when the market improves.

Analysts added that the move of the committee could also scuttle the government's proposed divestment plan as even the IPO funding for the banks have been tightened up and therefore the retail participation of these issues would be reduced to a bare minimum.

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