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Banks face a check on market loans

The proposed Reserve Bank norms limit exposure to 40 per cent of banks' net worth, reports Arun Kumar.

india Updated: Nov 23, 2006 05:28 IST
Arun Kumar

Some leading banks are heading for severe constraints in extending loans against shares or, for equity investments.

The Reserve Bank of India (RBI) has tightened its grip on lending by banks for capital market exposure in a draft of new guidelines which also target personal loans in which advances are given against shares.

The guidelines proposed last weekend, which are subject to revision after feedback, are scheduled to take effect in January. Current rules restrict banks’ exposure to the capital market at five per cent of their total advances but the proposed guidelines have capped it at 40 per cent of a bank’s net worth, which is the sum of its paid-up capital and reserves.

The RBI has also capped the amount an individual can borrow against shares or equivalent instruments from the entire banking system at Rs 20 lakh. The current norms limit lending to Rs 20 lakh, but this is with respect to individual banks, not the system.

Loans to venture capital funds are also now included under the definition of equity exposure.

Officials say that leading banks, including the Union Bank of India, Bank of India, HDFC Bank and UTI Bank, which have high exposure in the capital market, could be containedby the new norms.

All four had capital market exposures of between 31.5 to 39.2 per cent of their net worth as on March 31 last. Some banks including Andhra Bank, Corporation Bank and the State Bank of India are expected to be the least affected as their capital market exposure is well below 40 per cent. SC Gupta, chairman of Punjab National Bank, said the guidelines would help productive loans.

"It is an endeavour by the central bank to bring down speculative exposure as some banks were taking aggressive exposure in equity-related instruments," he said. The new guidelines will also affect the interest margins of some banks such as HDFC Bank and UTI Bank which have been highly focused on high-yielding personal loans that now face a check.

Kalpana Morparia, Joint Managing Director of ICICI Bank, said the guidelines offered some elasticity because the definition of net worth includes retained profits, and hence 40 per cent of a bank’s retained profit each year could be added to capital market exposure.

The RBI has also tightened the definition of what capital market exposure would be. Under the current rules, if a loan is given against shares but is used for personal purposes such as funding of education or a home, it is not considered as part of a bank’s exposure to the capital market. This flexibility is now set to end.

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First Published: Nov 23, 2006 05:28 IST