Bankers Find Monitoring Of Margin Funds A Tough Task

Banks have expressed disappointment at Reserve Bank of India's (RBI) margin trading norms which they say, places an undue burden on them to ensure end-use of funds lent under margin trading.

Further, banks have said they expected the RBI to clarify whether the funds for margin trading is to be placed with the central monitoring agency like the clearing corporation.

"Obviously, the clearing corporation is in a better position to track the market exposure of individual brokers as also to sniff out irregularities in trading patterns. Since this does not form the core operation of banks, it if difficult to see banks enthusiastically lending to dispersed brokers," a senior with a private bank said.

 

"A clearing corporation would be ideally suited to guarantee the repayment of funds lent for margin trading," he added, noting that banks are not supposed to be taking a price risk on margin lending but only a credit risk.

But reacting to the RBI guidelines, State Bank of India Chairman Janaki Ballabh said, "It is a positive stance. Since it is only meant for the Sensex stocks and for the brokers we will be willing to lend money."

On Saturday, the RBI circulated detailed guidelines for bank lending on margin trading to brokers. The RBI said banks should ensure there is no concentration in their lending to any single broker or group of brokers. Further, banks are to ensure the end-use of funds. That is, to ensure that the sums lent ostensibly for margin trading are not diverted for any other purpose.

In order to ensure that bank officials do not cultivate a nexus with brokers, the RBI has stipulated that "Stockbrokers who avail of margin trading will be prohibited from lending directly or indirectly, to their own connected entities, relatives or business associates or those of the promoters or directors of the bank through this facility."

The RBI said the banks are to keep a minimum 40 per cent margin on the shares being funded, and that these shares should only be in the dematerialised mode. The banks are to retain a pledge on the share funded till such time as the loan is repaid. Banks should also put in appropriate systems for monitoring the 40 per cent margin. The guidelines added, "If the stockbroker/client fails to meet the margin calls, the lending bank should liquidate the collateral/shares purchased immediately and adjust the loan."

The RBI clarified that these guidelines are only "experimental" in nature and will be reviewed after 60 days (November 22, 2001).

But other bankers said there is a minefield of confusion in the guidelines. For instance, a banker said the guidelines do not specify who will sell the shares to recover the money in case the broker is not able to meet margin calls.