Banks told to hike margins on advances against shares

The Reserve Bank of India (RBI) has directed banks to raise the margin on all advances against shares and financing of initial public offerings and issue of guarantees from 40 per cent to 50 per cent with immediate effect.

The central bank has also hiked the minimum cash margin in respect of guarantees issued by banks for capital market operations to 25 per cent (within the margin of 50 per cent) as against 20 per cent (within the margin of 40 per cent).

The margin of 50 per cent applies to all fresh advances and guarantees issued for capital market operations. The existing advances/guarantees issued may continue at the earlier margins until they come up for renewal.

According to sources, the hike in the margins may have been prompted by the run-up in the market and the huge demand for financing of initial public offers (UCO Bank, Indraprastha Gas Ltd, TV Today, etc).

It was also to address the possibility of inadequacy in margins in case the stock market slides.

"The margins are normally increased when there is a perception of an increased risk in the market volatility or a downward trend. The move would also lead to curbing speculators entering the IPO market as investors will have to bring in more money. However, the effect of this would be only marginal in the overall market," said a senior private sector banker.

Most of the private sector banks and foreign banks have seen a spurt in their loans against shares.

However, broker financing has not witnessed a sharp spurt as banks are more wary of lending to brokers.

Also, even as the RBI had earlier stipulated a 40 per cent margin for IPO financing, some of the banks have been taking margins between 40-60 per cent.

Even as loans against shares portfolio is considered to be one of the safest retail products, any dilution in the margins or share selection process could affect the portfolio, said bankers.

However, as compared to the previous market boom, where bankers were more into financing of brokers, this time around they are more focusing on the retail market.

The RBI has also been keeping a strict watch on banks' exposure to capital markets. Interest rates on loans against shares have also dropped to 9 per cent from around 14-15 per cent around three years ago.

RBI had prescribed a ceiling of five per cent of total outstanding advance of the previous financial year on banks' overall exposure to the capital market. The five per cent ceiling prescribed for investment in shares applies to total exposure including both fund-based and non-fund based to capital market by a bank in all forms.

It also covers banks' direct investment in equity shares, convertible bonds and debentures and units of equity-oriented mutual funds.