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Guidelines on banks' exposure to stocks in May

The Reserve Bank of India will issue fresh guidelines for exposure of banks to stock markets early next month to adopt prudential measures for capital market lending.

Taking into account the recent volatility experienced by the stock markets, the RBI-Securities and Exchange Board of India joint technical committee has suggested measures for better regulation of banks' advances against shares and financial guarantees, RBI said in its Monetary and Credit Policy for 2001-02 in Bombay on Thursday.

The committee recommendations were expected to minimise the possibility of 'unwarranted' and 'unethical' nexus emerging between some inter-connected stock broking entities and promoters/managers of some private sector and co-operative banks, it said.

The committee had found that the overall exposure of banks in capital markets (both funded and non-funded credit facility) was modest.

However, some small banks had not observed risk-management guidelines for advances against shares and financial guarantees to stock broking entities.

The concentration of exposure to few broking entities by these banks was 'unjustified' on prudential grounds and substantially raised the risks attached to such advances and guarantees, it said.

RBI had earlier issued similar guidelines on banks' investment in shares and their exposure to capital markets in November 2000, the RBI report said.

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Monetary & Credit Policy 2001-2002 (First Half)

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