IBA calls for Mint Road rethink on margin trading

The Indian Bankers' Association (IBA) has asked the Reserve Bank of India (RBI) to take a relook at the existing guidelines on margin trading for banks now that the Securities and Exchange Board of India has decided to introduce it from February 1.

This was because the existing guidelines are too stringent for banks to take up margin trading. Bankers are not very keen on taking up margin trading despite the fact that it is now allowed by Sebi.

"The present guidelines are very stringent evoking little interest from bankers. The banking industry might take up margin trading on a regular basis if the apex bank revises its rules and makes it a little liberal - because operators are hesitant of taking the increased risk inherent in margin trading," said one senior banker from a public sector bank.

Margin trading also needs to be made operator friendly and brokers who take the risk on behalf of their client are shying away.

"There are a whole host of operational issue that needs to be addressed before banks take on margin trading," said another banker.

"Operators are also shying away for they are not comfortable with the idea of taking increased risk because they have burnt their fingers in the past, adding to the problems of the bankers," he said.

Further, the RBI also has to clarify a number of issues. "We are not sure if margin trading will fall under the five per cent sensitive investment limit, and capital adequacy norms for the same also need to be clarified by RBI," the banker explained.

The reporting requirement, monitoring of limits are issues which need more clarification, according to brokers. Sebi has however said that it will issue a circular on this shortly.

The RBI although has introduced a system of margin trade financing by banks but it has failed to take off precisely because of the lack of a comprehensive risk management system on the part of brokers.

The Reserve Bank needs to take a more liberal and a comprehensive view of margin trading if it wants the Indian banking system to take on margin trading, said bankers.

Clients will have to pay an initial margin of 50 per cent with a maintenance margin of 40 per cent - but the margin for Bankers also need to be clarified by either the Securities and Exchange Board of India or the Reserve Bank of India.