Nse Cautions Banks On Broker Loans

The National Stock Exchange (NSE) has advised some of its clearing banks, which have been aggressive in extending credit to brokers, to review their limits as well as the quality of assets against which funds have been extended.

In a related move, Sebi yesterday informed the Reserve Bank of India (RBI) about some banks that have been extending credit or providing bank guarantees to brokers at very low margins.

Sources said Sebi was concerned over possible exploitation of the banking system by brokers taking large exposures on the back of guarantees. That is why it said all brokers would have to ensure that 50 per cent of all capital and margins furnished by them were in cash by March-end.

 

The sources said that the regulator was of the view that while it could take steps like slapping higher margins, there was little it could do to prevent misuse of bank funds.

The NSE has already held informal discussions with some of its clearing banks and told them that considering the overheated state of the markets, they should review their credit limits to brokers. NSE currently has four clearing banks__HDFC Bank, Global Trust Bank, Canara Bank and IndusInd Bank__but two of these banks which have been aggressive in extending credit to brokers have been asked to review their guidelines, said top NSE sources.

In a related move, Sebi chairman DR Mehta on Monday is believed to have taken up the issue with senior RBI officials of some banks extending bank guarantees, overdrafts and loan against shares, at low margins which could be misused by some brokers to build up large positions and in the process manipulate the markets.

Although Mehta declined to comment on the issue, sources close to him said that RBI has informed Sebi that it is looking into the issue and could shortly take some measures.