Loan-Against-Shares Scheme For Brokers

The Bombay Stock Exchange (BSE) has formulated a strategy to rope in banks to meet the working capital requirements of its members.

Under the scheme, brokers will deposit share certificates as a collateral against loans and the entire operation will be virtually risk-free.

Although the Reserve Bank of India is not against banks providing loans against securities, banks have been unwilling until now to provide such loans because of the inherent risks arising from the volatility in share prices.

The BSE brass will soon hold talks with leading banks to persuade them to meet the working capital requirements of brokers and, more importantly, to allay the fears in the minds of the bankers about the risks involved while providing loans to marketmen against shares.

 

The move is also important because the Mumbai police is of the view that badla financing (currently done by BSE brokers) as a form of money lending activity should not be carried out by anyone but a licence holder under the terms of the Bombay Money Lenders Act, 1946.

According to BSE executive director, R C Mathur, a few of the top bankers have been already informally approached and their reaction has been enthusiastic.

In order to address banks concerns about the risks that will arise because of a drastic fall in share prices, BSE proposes to introduce a daily mark-to-market monitoring of securities and immediate replenishment of eroded assets. This means that if a broker deposits shares (of the A and B1 groups) worth a certain amount to a bank while accessing loans, the concerned share prices will be monitored on a daily or weekly basis or whatever time-frame the bank deems fit.

If the price falls below 30 per cent of the total valuation of the shares deposited and the broker does not make good the shortfall either by way of depositing more shares or returning some of the funds, then the bank will be free to auction the shares, thereby giving quick liquidity in times of market upheavals.

In fact, there could be system by which banks would ask brokers to meet their shortfall the moment share prices dip below 20 per cent, Mathur explained.

On the issue of BSE setting up a separate financing institution to fund brokers working capital requirements for which it has received Sebi approval, Mathur said: Stock exchanges were not set up to run banks.... mobilising large amounts of resources for working capital requirements of brokers on a continuous basis could be a problem.

However, the BSE would look into this area if banks do not show interest in this project, he added.

Mathur said banks could also formulate an industry-specific exposure list.

This will enable them to select specific stocks. Banks could also spread their risks in terms of selecting the scrips and fortunes of a bank will depend on their risk portfolio, he added.