They are aggressively subscribing to initial public offers and follow-on offers of India Inc.
"Exposure to equity is becoming an essential part of our treasury operations. With rising interest rates, there is virtually no income from debt market operations. We are trading in equities," M Balachandran, chairman and managing director, Bank of India said.
The CEO of another large Mumbai-based public sector bank said his bank had made substantial investment in the IPOs of a few companies recently. But no bank chief is willing to divulge the amount banks are investing in stock markets.
According to the Reserve Bank of India norms, banks' capital market exposure is capped at 5 per cent of total advances. But this includes direct exposure to the market as well as loans against shares given to customers. None of the PSBs has hit the ceiling in capital market exposure so far.
Foreign institutional investors, domestic mutual funds and Life Insurance Corporation of India always got preference over PSBs.
"This has changed the scenario. State Bank of India and Punjab National Bank have been buying shares in most of the IPOs," said an investment banker. Bank of India and Bank of Baroda, too, had stared taking exposures in the equity market, said another banker.
"The removal of discretion has made the allotment process equitable," said a treasury official with Bank of Baroda.
PSBs' new interest in equity trading has come at a time when the Reserve Bank of India is in the final stages of announcing new norms for capital market exposure of banks based on their net worth against the current practice of pegging it to outstanding advances.
According to the new guidelines, while total exposure of a bank will not exceed 40 per cent of its net worth, its direct investment in the equity market will be limited to 20 per cent of the net worth.
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