Bank fund flow to bourses squeezed

Rs 10 lakh cap on loans to any single borrower.

The Reserve Bank of India (RBI) has sought to further tighten the flow of bank funds into the capital market. In a big blow to broking firms and corporates, the central bank's proposals will reduce access to bank funds against security of equity and equity-linked investments.

The RBI has said the entire banking system cannot lend more than Rs 10 lakh for subscribing to shares in an initial public offer (IPO) to any single borrower "" be it an individual, a partnership firm or a company. Any general purpose borrowing from banks by an individual or a corporate against security of equity investments is also proposed to stifled.

The RBI has said any single borrower can borrow from the banking system against security of such investments only up to Rs 10 lakh if the security is held in physical form and only up to Rs 20 lakh if the security is held in demat form.

These borrowing limits are currently applicable only to individuals. The draft guidelines issued by the RBI today on rationalisation of norms for banks' exposure to the capital market propose to extend the limits to partnerships and companies. The RBI has proposed to give effect to the new norms from January 1, 2007.

"The entire effort has been to link banks' capital market exposure to risk-taking ability. Prescribing a limit of Rs 10 lakh for extending loans or advances to any single borrower, including individuals, corporates and partnership firms, for subscribing to IPOs will restrict the scope for playing with funds and manipulation," a State Bank of India executive said.

Banks have been asked to obtain a declaration from every borrower indicating the details of loans and advances availed against shares and other securities from any other bank or banks in order to ensure compliance with the ceilings prescribed.

Broking firms and corporates borrow huge amounts from banks against the security of equity shares and equity-linked instruments. The new norms will almost stop access to bank funds for broking firms and corporates against security of shares.

The proposed norms seek to restrict a bank's aggregate capital market exposure to 40 per cent of its net worth on a solo and consolidated basis and direct exposure to 20 per cent of the net worth on March 31 of the previous year. Currently, the capital market exposure ceiling is 5 per cent of total advances at the end of the previous year.

Banks like State Bank of India, ICICI Bank and Industrial Development Bank of India will see a huge gain with the RBI excluding from capital market exposure shares acquired as a result of conversion of debt/overdue interest into equity under the corporate debt restructuring mechanism.