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No decision yet on banks' advances to brokers

BS Markets & Banking Bureaus

The standing committee on banks' capital market exposure, which met Thursday, did not formalise the decision to cap banks' advances to brokers. The panel will meet again on March 27.

The committee on Thursday took stock of the ongoing investigation by both the regulators -- Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi).

Thursday's meeting was attended by senior RBI officials -- G P Muniappan, executive director, A Ghosh, special adviser, M R Srinivasan, chief general manager and Sebi executive directors Pratip Kar and Dharmishtha Raval.

This is the first meeting of the standing committee since the recent crisis has engulfed the market. The RBI had earlier this month called for the latest data of stock market exposure from all commercial banks.

According to Sebi sources, the talks centered around the volatility in scrip prices, bank funds being diverted to fund stock market operations and collaterals deposited with the banks' not being adequate to cover for the shortfall in case of a downturn in stock prices.

The invoking of bank guarantees by the Calcutta Stock Exchange (CSE) and the subsequent reluctance of banks to honour their agreements was also among the major items on the agenda. The payments crisis on the bourse, relating to the previous settlement, has been aggravated to a large extent by the banks' indifference with respect to the bailing out defaulting brokers, Sebi officials said.

The market regulator is also understood to have raised the issue of commercial banks extending finance for carry-forward trades. While RBI has hitherto been rather cold to this idea, recent indications are that it may allow banks to extend finance provided banks have the necessary expertise to sustain such exposures.

The standing committee also discussed the issue of linking bank advances to the equities market and putting a cap of 10 per cent on it. Officials who attended the meeting said a final decision on this will be taken at the next meeting.

The committee, in November last year, linked banks' investments in markets to its total outstanding advance portfolio and capped it at five per cent, provided it is not exceeding 20 per cent of the net worth. However, the committee had then given discretion to bank boards to decide on the quantum of banks' advances against shares (financing of IPOs, advances to individuals, brokers and market makers, issue of guarantees on behalf of brokers and as well advances to corporates to meet promoters' contribution).

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