'Cap on banks' lending will hit markets'

The Reserve Bank of India's proposed exposure limit on banks lending to capital markets – particularly, its decision to restrict loan against shares by a 'single borrower' at Rs 20 lakh – would have a significant negative impact on the stock markets, if the definition of single borrower included not just individuals but also corporates and broking houses, said officials in the broking industry.

The move was also likely to curb margin financing in the stock markets in a big way, they said.

Further, the fact that the RBI plugged the existing loophole in the banking system has forced individuals take loans against shares exceeding their individual limit by approaching more than one bank for the purpose.

"It is certainly a jolt to traders. The move will trigger some selling in the market on Monday," Vijay Kedia of Kedia Securities said. However, the exposure limit of Rs 10 lakh on IPOs would ensure that every segment of retail investors benefited from the new issues, he added.

"Right now, we are seeing IPOs getting 40-50 times subscription. This will end now," Kedia said.

Ketan Jhaveri of DH Securities said the proposed guidelines required more clarity. "There should be more clarity on the single borrower issue. Currently, corporates are allowed to take unlimited funds by pledging shares. It is very difficult to bring it down immediately," he said.

Head of another broking outfit said the move would help contain "over leveraged position" in the stock markets. The sharp correction witnessed in June was also attributed to selling of shares held as collateral by banks. "The time given, till January 1 next year, to lower corporates' exposure to the proposed levels is also not too long. We can see some sort of correction in the market in the coming days because of this," he said.