Boom spurs banks to increase exposure

The boom in the stock market has led to banks being permitted to take greater exposure to the capital market.

HDFC Bank has been the first to receive approval to raise its exposure limit to 8 per cent of outstanding advances at the end of the previous year.

"With the market growing, we do not want to lose our market share," said Aditya Puri, managing director, HDFC Bank. Today the private sector bank has a market share of over 50 per cent of daily volumes on the two stock exchanges.

"With the number of participants increasing and exchanges having risk mechanisms in place, as well as brokers being institutionalised, this is a good business without much risk exposure," said Puri.

The bank has not suffered any losses in the area of loans against shares over the last 6 years. "Only in the Calcutta crises we suffered a loss of Rs 2.5 crore "" because of guarantees," he added.

HDFC Bank is not alone in this. G Nageshwara Rao, managing director, IDBI Bank, says, "Greater number of customers are demanding financing against shares. We are also getting a lot of demand from brokers. Hence there is the need to increase the limit."

Rao said banks also want to run their proprietary positions in the market, though IDBI Bank has not done so yet. The stock market has seen huge growth with settlement volumes moving consistently northwards.

The daily average settlement on the National Stock Exchange is about Rs 1,277.6 crore. On the Bombay Stock Exchange it is about 40 per cent less than that.

Settlement by banks account for about Rs 800-1,000 crore on the two exchanges, and HDFC Bank has a 50 per cent share of this transactional float between pay in and pay out. "While there is no money to be made from this, it gives us float," said Puri.

Moreover, funding needs have increased considerably and HDFC Bank is keen to be in the entire value chain right from clearing and settlement for all the exchanges to dealing with as many good and sound brokers as well as foreign institutional investors as possible.

"We only deal with those who have a history and do good volume on the exchanges, as we deal only with intermediaries and not proprietorships," said Puri. Permitted an 8 per cent exposure and taking the bank's last year's outstanding advances of Rs 17,700 crore, it can take an exposure of up to Rs 1,416 crore.

The 8 per cent limit is inclusive of the bank's investments in equity shares, convertible bonds and debentures and units of equity oriented mutual funds, advances against shares to individuals for investments in equity shares (including IPOs), secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market makers.

"As the market grows, our capital market business grows accordingly," said Puri.

As per the RBI report on banks' exposure to the capital market, commercial banks increased their exposure by 34.17 per cent to Rs 3,333 crore at the end of March 2004.

This is as against Rs 2,484 crore in the preceding fiscal.

The central government's announcement in the annual budget 2003-04 allowed banks with a strong risk management system to increase their exposure to the capital market. This follows many private sector banks breaching the exposure limits during upswings in the capital market.

Commending the RBI's ability to ensure against any systematic failures in the banking and capital market segment, Puri pointed out that with 40 per cent margining, how much can one lose.