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| Banks' VC exposure to cost more |
| Shilpy Sinha / Mumbai Feb 18, 2010, 00:33 IST |
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The risk weight on banks’ VC investments may rise to 200% from 150% now.
If US President Barack Obama has floated a proposal to curb commercial banks’ exposure to private equity (PE) funds, the Indian banking regulator plans to increase risk weight on banks’ investment in venture capital (VC) funds by 50 per cent.
According to a Reserve Bank of India (RBI) discussion paper, the risk weight on banks’ investment in venture capital would rise to 200 per cent against 150 per cent at present.
While for PEs engaged in leveraged buyouts, RBI is planning to assign a risk weight of 250 per cent in view of higher risk involved in such transactions by banks.
VC investments are covered under the capital market exposure norms of banks. The exposure of a bank to the capital markets is capped at 40 per cent of its net worth. Within this overall ceiling, bank’s direct investment in both registered and unregistered VCs should not exceed 20 per cent of its net worth.
Risk weight is the portion of capital kept aside by banks as provision. As per the prudential norms pertaining to risk weight, banks have to hold capital in proportion to the risk of their various loans or investments. The capital requirement to the overall risk of bank assets is aimed at ensuring sufficient resources to cover losses resulting from high-risk loans.
This would impact VC subsidiaries floated by banks such as ICICI Ventures, Kotak Private Equity and Axis Private Equity.
Citing high capital requirement, the third-largest private sector lender, Axis Bank, has decided to exit from the space.
 “This is not a long-term strategic business to be in. It is a high beta business. Institutional investors want to invest in team-centric funds rather than in sponsorship funds,” said Shikha Sharma, managing director and chief executive officer, Axis Bank.
She added, “On the regulatory side, it appears that banks will have to keep aside more capital for this business. If it is not a growth opportunity and we do not have a competitive advantage in this business, we don’t want to be in.”
RBI wants banks to weigh the implications of entering new business which requires more capital, as the banking activity remains the priority. The country’s largest lender, State Bank of India (SBI), which has an infrastructure fund with Macquarie and IFC and plans to launch a host of PE funds, said this would impact the fund size.
“This would constraint the amount that we put in various VC and PE schemes since capital is always scarce. The need for providing such risk capital for upcoming companies and some large infrastructure projects is crucial in this phase of economic development,” said a senior SBI executive.
“Even if the risk weight on banks’ investment in this segment goes up, it will make sense for banks to invest in this space. Return on equity will justify the investment in this asset class,” said a spokesperson of ICICI Ventures.
ICICI Ventures plans to raise a $500-million fund. The PE fund floated by ICICI Bank, the largest private bank, has already raised $350 million. Most of the money in the fund has come from domestic market and is gearing up to do international roadshows to tap the overseas market.
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