RBI moots banks' entry into broking

The Reserve Bank of India has proposed an amendment to the Banking Regulation Act (BRA) to allow banks to be members of stock exchanges and undertake merchant trading.

In other words, if the proposal goes through banks will be allowed to enter the broking business.

The move would take forward the efforts of the government to create strong domestic institutional players in the Indian equity market.

At present, as per the guidelines of the capital market watchdog Securities and Exchange Board of India (Sebi) and stock exchanges manual, banks are not allowed membership of stock exchanges to undertake trading on behalf of others - referred to as merchant trading.

As per the RBI guidelines, banks now on their own could take an exposure to the equity market up to five per cent of their total portfolio.

According to banking sources, the RBI move follows the budget announcement made by the finance minister last year urging the banks to have more "leeway" in the equity market.

The central bank has also suggested that the amendment of Section 6 of the BRA should be followed up with amendment to the Securities Contract Regulation Act (SCRA) so that stock exchanges regulations allow bans to conduct this business.

Senior bankers said that the finance minister has informally asked the banks to prepare themselves to be active participants in the equity market and take stock exchange memberships in his meetings with various bank chairmen.

Sources said some of the major public sector banks have already firmed up their plans to apply for the stock exchange memberships and are in the process of applying to the respective regulators.

Banks are of the view that even after the membership of the stock exchanges, they should continue to be governed under one regulator-the Reserve Bank of India. They feel that it will be difficult to be governed under two different regulators.

As far as allocating higher limits to the banks for trading in the equity markets, the RBI is deliberating a case to case basis approach instead of hiking the umbrella limit for banks' investment in the equity market.

The approval for higher limit might witness set of conditions, primarily related to internal risk managements of the banks for allowing them to operate in the equity market in excess of prescribed limit.

Till now RBI has been conservative in its approach to allow banks to have additional exposure to equity market.

Sources added that there was another proposal to ask individual board of banks-which are far less exposed in the equity market-to analyse their risk management systems and become more active in the equity market. However, no final was taken as far as the proposal was concerned.