The stance announced by the Reserve Bank of India to increase the flow of funds from the banking sector to the capital market has not yet succeeded in breathing life into the market sentiments.
The market has remained depressed for over two years, and ever since the Reserve Bank has been announcing subtle policy changes to revive the capital market by relaxing the norms binding the bank funds flow to the bourses.
Initially, the bank could invest in the debentures, bonds, shares of private corporates bonds and public sector undertaking up to five per cent of their incremental deposits of previous year. However, the investment in the shares was only through the primary market route.
The RBI went ahead and relaxed this restriction in 1996 when it announced that banks could buy and sell in the secondary market as well, but limited investment upto five per cent of their incremental deposits of the previous year.
However, none of the leading banks has ventured in the trading of secondary markets. Bankers urge that the capital market is volatile and banks do not have the infrastructure to trade in the secondary market. With banks deposit growing by 18 per cent, the investment of banks in primary and secondary market would be in the region of Rs 5,010 crore.
In yet another attempt to revive the market, the RBI decided to exclude the investments in preference shares, debentures and bond outside the purview of five per cent limit which is linked to incremental deposits. This was aimed at increasing the flow of funds to the capital market. However, due to volatility and poor quality of public issues, several banks declined to utilise the five per cent limit.
In the last monetary policy, the RBI permitted banks and financial institutions to provide bridge loans up to five per cent of their incremental deposits of previous year. Two years ago, the RBI had banned banks investment in bridge loans as it was not rightly utilised following the MS Shoes scam. Last fiscal, most of the money raised from the market was in the form of private placement and the primary market continued to remain dull.
