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April 19, 2001
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Limited impact of RBI moves seen on markets

NetScribes/Salil Panchal

The Reserve Bank of India's stringent measures to police cooperative banks and their stock market activities will have only a limited impact on the markets.

Fund managers, foreign institutional investors and brokers said that with alternative lending and financing mechanisms available to the stock markets, this measure will only be looked upon as a regulatory step by the central bank. It may not necessarily delink the banking system from the stock markets.

In order to strengthen prudential measures, the Reserve Bank of India has proposed that urban co-operative banks will have to - with immediate effect- refrain from taking on any fresh proposals to lend directly or indirectly against shares either to individuals or any other entity. They have also been "advised" to unwind existing lending to stock-brokers or direct investment in shares, at the earliest.

K R Bharat, managing director, CSFB, said the move would have a limited impact. "We have seen what has taken place at the markets in recent months. In view of this, there must be one common regulator which can oversee the financial system and the stock markets,'' he said.

According to Nikhil Khattau, CEO, Sun F & C Mutual Fund, "The move to police the UCBs will not have an immediate impact. The market has probably turned it down as there are clear alternative financing routes. The RBI is obviously only looking to work on regulating bank finance to the stock markets,'' he said.

According to a broker at K R Choksey Shares and Securities Pvt Ltd, even if all the cooperative banks unwound their positions, it would not have any impact on the stock markets. Market estimates put cooperative bank exposure to the equity markets at Rs 8 billion.

The report of the RBI-SEBI Technical Committee, which was submitted to RBI on April 12, 2001 was released recently. The Committee has found that the overall exposure of banks in capital markets (both in terms of funded and non-funded credit facilities) continues to be modest, but some relatively small banks (in terms of their share in total advances) do not seem to have observed appropriate risk management guidelines, particularly in respect of advances against shares and non-funded guarantees to a few stock broking entities (including their associated and inter-connected companies).

According to the RBI, this concentration of exposure towards a few entities by these few banks was unjustified on prudential grounds and substantially increased the risks attached to such advances/guarantees, besides raising serious ethical concerns.

In the light of the recommendations of the technical committee, the RBI has also proposed to revise the guidelines issued earlier in November 2000 on banks' investments in shares as also advances against shares and other connected exposures and issue the final guidelines in three weeks time.

Monetary & Credit Policy 2001-2002 (First Half)


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