Banks will have to call back around Rs 9,000 crore (Rs 90 billion) in loans to stock brokers after the Reserve Bank of India's (RBI's) proposed norms on banks' capital market exposure take effect from January 1, 2007.
The proposed norms seek to restrict advances against shares from the entire banking system to a single borrower to Rs 20 lakh (Rs 2 million) if the security is held in demat form and to Rs 10 lakh (Rs 1 million) if the security is held in physical form, banking sources said. The ceiling applies to individuals, partnerships and companies.
Bank borrowings by brokers, most of them day traders, ranges between Rs 1 crore (Rs 10 million) and Rs 10 crore (Rs 100 million).
Day traders are participants who hold positions for a very short time and enter into several trades every day. The day traders will have to substantially scale down their operations, which is likely to affect trading volumes.
"Big traders take loans from banks. The new rules will stifle these unhealthy market practices," said the head of a brokerage house.
The RBI has been warning banks against increasing exposure to real estate and the capital market as it considers asset prices as too high for comfort. Banks' lending to brokers had increased by 51 per cent to Rs 7,357 crore (Rs 73.57 billion) at the end of March 2006 from Rs 4,879 crore (Rs 48.79 billion) a year earlier.
The RBI has also proposed that banks cannot lend more than Rs 10 lakh against shares to any borrower -- individual, partnership, company -- for subscribing to shares in initial public offers (IPOs). This borrowing limit was earlier applicable to individuals and that too from a single bank.
The impact of the move would be felt on the forthcoming issues of Cairn Energy (Rs 9,000 crore -- Rs 90 billion), DLF Universal (Rs 9,000-Rs 11,250 crore -- Rs 90-112.5 billion), Gujarat State Petroleum Corporation (Rs 4,500 crore -- Rs 45 billion) and Multi-Commodity Exchange (Rs 315 crore -- Rs 3.15 billion). These IPOs are expected in the first quarter of 2007.
Now, brokers would not be able to get leveraged funding from banks. Leveraged bids were largely responsible for high subscription levels of IPOs.
Officials of brokerage houses said this would also affect subscriptions from high-networh individuals and mega networth individuals, who bid for IPOs in a big way.
"I think we will see some sort of normalcy in the IPO subscription levels (after the RBI rule comes into force)," said Dinesh Thakkar, managing director, Angel Broking.
While foreign investors use their own money to bid, it is felt that HNIs and MNIs use the banking channel. "We may not see IPOs getting heavily subscribed in the retail segment following the new rules," said Vijay Kedia of Kedia Securities.
Most IPOs see huge subscriptions as big investors use the funds from the banking system. The RBI has sought to plug this funding route as it does not want bank funds to cause a further rise in asset prices, bankers say.
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