This comes as a follow up to its September 30 deadline to banks for meeting stricter capital market exposure norms that were imposed after the Sensex crossed the 20,000-mark in December 2007.
Under the new arrangement, which will be reviewed after a year, only those banks would be permitted to issue irrevocable payment commitments (IPCs) whose agreement with clients allow them right over securities to be received as payout in any settlement.
“The maximum risk to the custodian banks issuing IPCs would be reckoned at 50 per cent on the assumption of downward price movement of the equities bought by FIIs/mutual funds on the two successive days from the trade date of 20 per cent each with an additional margin of 10 per cent for further downward movement,” RBI said in a notification. IPCs are like non-fund based credit facility for purchase of shares. “...it has been decided to put in place adequate risk mitigation mechanism to protect the banks from the adverse movements in the equity prices and the possibility of default by domestic mutual funds/FIIs, while ensuring that there is no undue disruption in the functioning of the capital market in the country,” it added.
In December 2007, RBI had widened the definition of stock market exposure to include banks and all banks who exceeded the exposure limits after applying the wider definition, were required to bring down their exposure within six months from June 2008. However, that deadline was subsequently extended many times.
The apex bank had justified imposing the new guidelines citing that mutual funds should normally meet their repurchase/redemption commitments from their own resources and resort to borrowing only to meet temporary liquidity needs and any bank lending should be only to meet temporary liquidity needs.
Capital market exposure include investments in convertible bonds, debentures, and all exposure to venture capital funds. The current norms for investments by banks stipulate that no banks will have overall capital market exposure exceeding 40 per cent of the lender’s networth as on March 31 of the previous financial year.
RBI latest notification added that the potential risk on the day after the trade date would be considered as 50 per cent and treated as capital market exposure in case the margin payment is not made.