Tighter rules for bank equity in financial entities

Banks will have to set aside extra capital for equity investment in financial entities, even if the latter were exempted from capital market exposure norms.

The Reserve Bank of India has said such exposure will attract a 125 per cent risk weight or whatever is the weight warranted by the other party’s external rating, whichever is higher. The 125 per cent risk weight amounts to a 11.25 per cent capital charge, meaning Rs 11.25 crore on every Rs 100 crore exposure.

Earlier, investments which enjoyed exemption from capital market exposure norms attracted only 100 per cent risk weight.

A bank executive said the regulator wanted lenders to be cautious with equity investments in these entities when the markets were volatile.

If the equity investments in question are part of the trading book, meaning held for trading, there would be an added cost. Besides the 11.25 per cent capital charge, another nine per cent of the amount in question is to be kept, to cover general market risk, RBI said.