Shrinking Float Funds To Hit Clearing Banks

The earnings of clearing banks from their operations on all stock exchanges are expected to come down by about 40 per cent in the short term due to the shrinking of float funds with the introduction of uniform rolling settlement beginning July 2.

The clearing banks -- HDFC Bank, ICICI Bank, UTI Bank, Global Trust Bank, IndusInd Bank and Bank of India -- are responsible for executing client trades and other financial commitments of customers in the stock markets.

These banks normally receive funds from the brokers in fulfillment of their pay-in/ pay-out obligations for settlement of trades on the bourses and have a lead time of a couple of days before they settle outstanding trades in the clearing house.

 

The banks, therefore, put these funds, which are gratis and otherwise lie idle with them, to use by deploying them in the call money markets for one or two days and earn around 7-8 per cent returns.

Until last month, on an average, per settlement (weekly) the float funds amounted to roughly about Rs 2,500 crore. But the impending introduction of rolling settlement, whereby trades have to be squared off and settled on the fifth day from the day of trading, has dampened the trading sentiment. With the volumes and liquidity in the market coming down, the availability of float funds has also shrunk in tandem to around Rs 1,500 crore.

"Float funds will shrink further as market players have yet to come to grips with the rolling settlement-minus-deferral products. Therefore, the clearing banks will have less of such funds at their disposal in the next few months," analysts said.

The clearing banks will see their earnings from float funds shrink in this fiscal, they added.

An analyst pointed out that HDFC Bank, which is a big-time clearing bank on the stock markets, earns almost Rs 80 crore by deploying float funds in the short-term markets and that this could come down by around 40 per cent.

Rolling settlement is set to be introduced in 414 stocks, which together account for over 90 per cent of the total volumes on the bourses from July 2.