Banks Unlikely To Bite Margin Finance Bait

The Reserve Bank of India's (RBI) move to allow banks to finance margin trading may come to a naught as not many banks are willing to bite the bullet. The central bank has said the margin financing will be within the overall market exposure limit of banks.

Market-savvy banks have already breached the limit of 5 per cent of advances, while public sector banks which have the leeway do not have the expertise to lend to the markets.

A clutch of banks, including private and foreign, who were major players in the market have been asked by the RBI to bring down their exposure to the stock market. These banks had started unwinding their positions in the market and it may take them up to a year to reach the 5 per cent mark.

 

The RBI had earlier conveyed its 'displeasure' to four banks -- Global Trust, HDFC Bank, Bank of Punjab and Centurion Bank for their high exposure to the capital market including advances, guarantees and initial public offer financing. Bank of America, Karnataka Bank and Development Credit Bank were pulled up for their higher investment in equity.

Banks who are in a position to lend to the market include ICICI Bank, IDBI Bank and IndusInd Bank, among the new private banks, some foreign banks and most public sector banks.

"The move is a positive development. However we will have to look at the whole scenario. The bank will not take the plunge right now," said an official at IDBI Bank. ICICI Bank senior officials said the bank would be examining the scheme.

However, senior public sector bankers said banks will take the plunge only if the exchange plays a major role. "As bankers we would like to see that the bank's money is not diverted by brokers. The shares have to be given by the exchange directly to the bank till the loans are cleared so that banks will have a lien on the shares. Margin trading is suited more for traders than for investors. We will have to wait and see what role the stock exchange plays before deciding on our commitments," said a senior bank official.

A senior banker with a public sector bank said that margin financing will also be a good line of business as it will earn interest income, which will be at least 300 basis points above the prime lending rate. Also if care is taken then it can be regarded as a secure lending as there would be a lien on shares.