RBI issues final norms on Banks` capital mkt exposure
Banks with sound internal controls and robust risk management systems can approach the central bank for higher limits. New guidelines are effective from April 2007
In continuation of its policy to check spiraling asset prices amid a booming economy, the Reserve Bank of India (RBI) has reiterated its stringent norms on banks' capital market exposure.
The only relief is that banks with sound internal controls and robust risk management systems can approach the central bank for higher limits. The new guidelines on banks' exposure to capital markets will come into effect from April 2007.
As per the new RBI norms, banks' capital market exposures would include both their direct exposures and indirect exposures.
The aggregate exposure of a bank to the capital markets should not exceed 40% of its net worth. Within this overall ceiling, a bank’s direct investment in shares, convertible bonds/ debentures, units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) should not exceed 20% of its net worth.
The aggregate exposure of a consolidated bank to capital markets should not exceed 40% of its consolidated net worth as on March 31 of the previous year. Within this overall ceiling, the aggregate direct exposure by way of the consolidated bank’s investment in shares, convertible bonds / debentures, units of equity-oriented mutual funds and all exposures to VCFs should not exceed 20% of its consolidated net worth.
The Board of each bank should evolve a policy for fixing intra-day limits and put in place an appropriate system to monitor such limits, on an ongoing basis, according to the RBI. The position will be reviewed after an year, the central bank said.
Loans against security of shares, convertible bonds, convertible debentures and units of equity oriented mutual funds to individuals from the banking system should not exceed the limit of Rs1mn per individual if the securities are held in physical form and Rs2mn per individual if the securities are held in demat form.
In the case of IPOs, loans/advances to any individual from the banking system against security of shares, convertible bonds, convertible debentures, units of equity oriented mutual funds and PSU bonds should not exceed the limit of Rs1mn.
The RBI says that banks may extend finance to employees for purchasing shares of their own companies under ESOP to the extent of 90% of the purchase price of the shares or Rs2mn, whichever is lower. These instructions, however, will not be applicable to banks’ extending financial assistance to their own employees for acquisition of shares under ESOPs/ IPOs.
A uniform margin of 50% would be applied on all advances/financing of IPOs/issue of guarantees for capital market operations. A minimum cash margin of 25% (within the margin of 50%) would have to be maintained in respect of guarantees issued by banks.
Banks are free to provide credit facilities to stockbrokers and market makers on the basis of their commercial judgment, within the policy framework approved by their Boards, the RBI says.
However, in order to avoid any nexus emerging between inter-connected stock broking entities and banks, the Board of each bank should fix, within the overall ceiling of 40% of their net worth as on March 31 of the previous year, a sub-ceiling for total advances to:-
:tea:
Banks with sound internal controls and robust risk management systems can approach the central bank for higher limits. New guidelines are effective from April 2007
In continuation of its policy to check spiraling asset prices amid a booming economy, the Reserve Bank of India (RBI) has reiterated its stringent norms on banks' capital market exposure.
The only relief is that banks with sound internal controls and robust risk management systems can approach the central bank for higher limits. The new guidelines on banks' exposure to capital markets will come into effect from April 2007.
As per the new RBI norms, banks' capital market exposures would include both their direct exposures and indirect exposures.
The aggregate exposure of a bank to the capital markets should not exceed 40% of its net worth. Within this overall ceiling, a bank’s direct investment in shares, convertible bonds/ debentures, units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) should not exceed 20% of its net worth.
The aggregate exposure of a consolidated bank to capital markets should not exceed 40% of its consolidated net worth as on March 31 of the previous year. Within this overall ceiling, the aggregate direct exposure by way of the consolidated bank’s investment in shares, convertible bonds / debentures, units of equity-oriented mutual funds and all exposures to VCFs should not exceed 20% of its consolidated net worth.
The Board of each bank should evolve a policy for fixing intra-day limits and put in place an appropriate system to monitor such limits, on an ongoing basis, according to the RBI. The position will be reviewed after an year, the central bank said.
Loans against security of shares, convertible bonds, convertible debentures and units of equity oriented mutual funds to individuals from the banking system should not exceed the limit of Rs1mn per individual if the securities are held in physical form and Rs2mn per individual if the securities are held in demat form.
In the case of IPOs, loans/advances to any individual from the banking system against security of shares, convertible bonds, convertible debentures, units of equity oriented mutual funds and PSU bonds should not exceed the limit of Rs1mn.
The RBI says that banks may extend finance to employees for purchasing shares of their own companies under ESOP to the extent of 90% of the purchase price of the shares or Rs2mn, whichever is lower. These instructions, however, will not be applicable to banks’ extending financial assistance to their own employees for acquisition of shares under ESOPs/ IPOs.
A uniform margin of 50% would be applied on all advances/financing of IPOs/issue of guarantees for capital market operations. A minimum cash margin of 25% (within the margin of 50%) would have to be maintained in respect of guarantees issued by banks.
Banks are free to provide credit facilities to stockbrokers and market makers on the basis of their commercial judgment, within the policy framework approved by their Boards, the RBI says.
However, in order to avoid any nexus emerging between inter-connected stock broking entities and banks, the Board of each bank should fix, within the overall ceiling of 40% of their net worth as on March 31 of the previous year, a sub-ceiling for total advances to:-
- all the stockbrokers and market makers (both fund based and non-fund based, i.e. guarantees)
- to any single stock broking entity, including its associates/ inter-connected companies
:tea: