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RBI must not curb banks' exposure to shares: CII

The Confederation of Indian Industry has said that the way out of the current crisis in the financial markets should certainly not include placing greater restrictions on the participation of entities such as banks in the capital markets.

The capital markets need large institutional players such as banks and financial institutions to provide depth to and liquidity in the system, said the CII in a media release on Tuesday.

While investor sentiment had been affected by the recent developments, the CII reiterated that the single most important step towards gaining investor confidence in the financial markets is ensuring swift punishment for those who have not played by the rules.

It was the banks' exposure to capital market through advances against shares, that a tightening of regulations could help prevent future aberrations in compliance, according to the CII.

With regard to advances to stockbrokers, banks' exposures should follow strict internal guidelines fixed by the boards, including taking account of track record and credit worthiness of brokers and diversification of such advances in terms of both the number of brokers as well as the shares being traded, added the CII.

The confederation hoped that the recent developments would not result in the lowering of the overall 5 per cent ceiling for banks' investments in capital markets. In fact, subject to the building up of expertise for commercial as well as co-operative banks and stricter adherence to corporate governance standards, this ceiling should gradually be increased.

In view of the recent change in stance of the Monetary and Credit Policy to focus more on taking further the process of financial sector reforms and structural changes, the CII outlined a set of six measures that could be taken forward in the Reserve Bank's slack season credit policy:

1. Removal of the impediments to encourage asset securitisation.
2. Allowing financial institutions to fund overseas acquisitions/operations of Indian companies.
3. Increasing the foreign equity limit for banks from the current 20 per cent to 51 per cent for Indian private sector banks, both old as well as new. For public sector banks, it could be increased to 26 per cent initially, but should eventually go up to 49 per cent.
4. A roadmap for greater autonomy to bank managements, including the abolishment of the Banking Services Recruitment Board
5. Moving toward international norms for issuance of commercial paper by removing the 15 days minimum tenor requirement
6. Allowing asset management companies with no foreign exchange revenues to advertise on TV channels uplinked from other countries.

While more companies are increasingly exploring these globalisation possibilities, they are facing constraints relating to availability as well as pricing in raising debt offshore from international financiers to finance such transactions, the CII stated.

The industry association also stressed that the extant guidelines on overseas lending from the Reserve Bank of India should be changed to allow the financial institutions to fund the overseas acquisitions/operations of Indian companies.

The financial institutions would be ideally positioned to evaluate the long-term viability and extend credit for these overseas investments since they have built up considerable appraisal skills, added the CII release.

The CII further stated that it had always stood for management autonomy to public sector banks in taking decisions based on commercial principles.

The Credit Policy could be a vehicle for signaling a move towards ensuring that all future recruitment were done by banks themselves, the CII added.

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