Banks Exposure to Capital Market

Bank Exposure to Capital Market - RBI Master Circulation

Introduction:

On 1st April, 2007, the revised guidelines came into force. The summary is reproduced below – 

Components of Capital Market Exposure: 

• Exposures of the bank's capital market will include both their direct exposure and indirect exposure. The aggregate exposure (both fund non-fund based) pf banks to capital markets in all forms would include the following – 
• Advances for any other purposes where shares or convertible bonds or convertible debentures or units of equity oriented mutual funds are primary security; 
• Secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market makers. 
• Direct investment in equity shares, convertible bonds, convertible debentures and units of equity- oriented mutual funds the corpus of which is not exclusively invested in corporate debt; 
• Advances for any other purpose to the extent secured by the collateral security of shares or convertible bonds or convertible debentures or units of equity oriented mutual funds i.e. where the primary security other than shares/ convertible bonds/ convertible debentures/ units of equity oriented mutual funds does not fully cover the advances; 
• Advances against shares/ bonds/ debentures or other securities or on clean basis to individuals for investments in shares (including IPOs/ ESOPs), convertible bonds, convertible debentures and units of equity- oriented mutual funds. 
• All exposure to Venture Capital Funds (both registered and unregistered). 
• In the hope of raising the source, the loan to be approved by the corporation on the security or clearance of shares / bonds / debentures or other securities for the contribution of promoters to equity of new companies; 
• Financing to stockbrokers for margin trading. 
• Issue or converted bond or converted debenture or unit or Equity-based mutual fund reduces the bank's commitment to the primary issue. 
• However, on April 16, 2008, the banks can exclude their own underwriting commitments, underwriting commitments of their subsidiaries, through the running of books to reach the exposure of the single bank's capital market, the consolidated bank. 
• Bridges loans to companies against expected equity flows / problems. 

Limits on banks’ exposure to Capital Markets: 

Solo Basis – 

• The overall trend of the bank in the capital market is that all types (based on both fund-based and non-funded) do not exceed 40% of their Net Vantage till March 31 of the previous year. In this minimum ceiling, all exposures of direct investment shares of the bank, converted bonds / debentures, unit based mutual fund units and Venture Capital Fund (VCF) [new registrations and both unregistered] will not exceed 20% of their net value. 

Consolidated Basis – 

• The overall exposure of the unified bank from the capital market (both capital-based and non-fund-based) will not exceed 40% of its net variant as of March 31 of the previous year. In this minimum ceiling, total direct exposure will not exceed 20% of its net through allocation of shares of the merger banks, convertible bonds / debentures, unit-based mutual fund units and all exposure to the Venture Capital Fund (VCF) of their price. 

Lower Ceiling – 

• The above limit is the highest allowed and the bank's board of directors considers its overall risk profile and corporate strategy free to accept lower limitations for the banks. 

Definition of Net Worth: 

Including paid up capital and free reserves including premium of shares (except revolutions reserve), Vested Value plus Investment Reserve and Credit Balance in Profit and Loss (P&L) account, Low Debit Balance, less debit balance in (P&L) account, Accumulated Losses, Deposit Rate, Unreasonable Assets. 

Computation of exposure to Capital Market: 

To calculate the exposure, the guaranteed limit or outstanding guarantees issued for the approved loan / advance and capital market operations will be mentioned, which is higher. However, in case of complete drone term loan, where no part of the approved limit can be re-evaluated, banks may consider exclusively as exposure. Apart from this, the direct investment of the bank will be calculated according to their prices, shares, convertible bonds, convertible debentures and equity based mutual fund units.