Bank margin up for stock lending

RBI hikes margin to 50% on overheating fears.

The Reserve Bank of India (RBI) increased the margins on all bank advances against shares from 40 per cent to 50 per cent.

The increased margin requirements will apply to loans against shares, IPO finance and bank guarantees. Within the margins required for bank guarantees, the RBI has stipulated that at least half should be put up in cash.

The RBI had reduced the margin on bank financing of stock market-related activity to 40 per cent on May 18, the day after the Bombay Stock Exchange Sensex fell by 564 points. Stock markets had slid following the United Progressive Alliance's ascent to power with support of the Left Front.

The RBI has asked banks to implement the changes with immediate effect. It said the margin requirements were increased after a "review" of the developments in the financial markets. Brokers said the move was prompted by fears that the stock market could get overheated.

"It is driven by caution, given the kind of rise witnessed in share prices, even though the banking sector as a whole does not have a big exposure to the capital market," one stock broker said.

"The general banking system's exposure to lending against shares is minimal. Barring a few private banks, the exposure of large and nationalised banks is very small. Hence, not much impact is likely on the market," said Deena Mehta, managing director of broking firm Asit C Mehta Securities.

With a 50 per cent margin, banks can extend loans up to half the value of the shares deposited as collateral. A margin helps protect banks from being saddled with securities valued less than the outstanding loans. Banks can ask borrowers to deposit additional securities to meet the enhanced margin norms even on existing loans and guarantees.

Banks' exposure to the capital market, both loans and guarantees, is restricted to 5 per cent of the total outstanding advances on March 31 of the previous accounting year.

Banks' exposure to equities include credit facilities to stock brokers and market makers and loans to corporates against shares for meeting promoters' contributions to the equity of new companies.

Bank boards are also required to set a sub-ceiling for total advances to stock brokers and market makers and to any single stock broking entity within the overall 5 per cent ceiling.

The stock market has risen continually in the past few weeks fuelled by purchases by foreign institutional investors (FIIs). FIIs have been net buyers of shares worth over $8.5 billion in 2004.