The Reserve Bank of India (RBI) has decided to continue with its existing guidelines on bank financing for margin trading.
This decision was taken after RBI undertook a review 60 days after the guidelines were announced. RBI had then said that the guidelines would be reviewed at the end of 60 days.
In its letter to all commercial banks, RBI has said that "bank finance extended for margin trading should continue be within the overall ceiling of five per cent prescribed to capital market. It has also maintained that a minimum margin of 40 per cent should maintained on the funds lent for margin trading".
It has also maintained that the shares purchased with margin trading should be in dematerialised mode, under pledge to the lending bank.
The RBI has also maintained that an appropriate system for monitoring and maintaining the margin of 40 per cent on a regular basis. The RBI has also stressed that the bank's board should prescribed necessary safeguards to ensure that no "nexus" develops between inter-connected stock broking entities /stockbroker and banks in respect of margin trading.
Further, RBI has also stressed that margin trading should be spread out by a bank among a reasonable number of brokers and entities.
The RBI has also stressed that the audit committee of the bank should monitor periodically the exposure and should disclosed the total finance extended for margin trading in notes to accounts to their balance sheet.
The RBI-Sebi technical committee will again review the guidelines in June 2002.
However, market analyst point that RBI guidelines are silent on lending and advancing against the same stock if the stock moves up. Typically, if the stock prices moves up the broker is able to draw more money from the bank without pledging fresh securities.
This, in turn, will increase brokers money power. In fact, this has been the one of the root cause of concern in the recent stockmarket-bank scam.
