Banks' VC spend to be part of market exposure

MONETARY POLICY 2006-07

The Reserve Bank of India (RBI) today stipulated that banks' exposure to venture capital funds (VCFs) will be part of their capital market exposures. The central bank also increased the risk weight on investments in venture capital funds to 150 per cent.

In its 2006-07 annual policy statement, RBI said all exposures to VCFs will be deemed to be on par with "equity". Though VCFs play an important role in encouraging entrepreneurship but there is lack of adequate public disclosures about their performance/asset quality. As a consequence banks exposure VCFs need to be treated as "high risk", RBI said.

Bank of India chairman, M Balachandran, said the impact of having to treat venture fund investments as capital market exposure would not be much. Only some private and foreign banks are active in investing in venture capital funds and public sector banks have a very small role.

Most of the banks had invested in venture funds during 2003-04 and 2004-05, partly driven by government policy directives and also to deploy funds when the system was flush with liquidity.

G V Nageshwara Rao, chief executive - commercial banking SBU of IDBI, said "this is a measure aimed at aligning all equity-oriented risks within a single regulatory gamut.

Banks lend to venture capitalists at the face of it, but these funds ultimately get channelised into the equity markets.

Hence, this is a welcome prudential move but is unlikely to generate much of an impact within the banking sector as banks' total exposure to VCs is not very high."