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Protecting banks from market hits

PRESCRIBING STIFFER RULES on bank exposure to the stock market could be, akin to biblical commandments, prone to lapses. Over time, the RBI has laid down norms for banks placing funds in the market or lending monies against shares and even today they suf fice provided they are stuck to. At least, the stock market is still less risky than funding Bollywood, which has no balance sheet to offer for scrutiny. The Finance Minister, Mr Yashwant Sinha, after a three-hour talk with bankers, has said the RBI cred it policy on April 19 will have new norms on the subject. Bankers at the meet were all from the nationalised banks, most if not all of them having no trading desk to deal in the bourses. His message would have been better directed at the new private bank s some of which, preening feathers borrowed from foreign entities, have been transgressing RBI rules.

As at the end of March 2000, funds extended by banks to sensitive sectors, such as the capital market, real estate and commodities, was Rs 19,669 crore, forming 4.4 per cent of total advances. New private sector banks disbursed a maximum share of 16 per cent to total advances or Rs 3,550.8 crore to the sensitive sectors, with the capital market absorbing around 62 per cent, according to the RBI. Old private sector banks put in 8.1 per cent while foreign banks extended 7.2 per cent. In contrast, the SBI group had the lowest level of exposure to sensitive areas amounting to Rs 1,794.7 crore, or 1.4 per cent of its total advances.

Mr Ketan Parekh could play around with surplus funds of urban co-operative banks as neither the RBI nor the Registrar of Co-operative Societies was sure who was to play the guard. The central bank has on hand a report on urban co-operative banks by a hig h-powered committee and, as usual, it is being perused by financial researchers. Again, the RBI has little to say on a huge agricultural credit system with NPAs of 50 per cent, or the private placement market with some Rs 20,000 crore worth of funds slos hing in the system. There is a turf battle between SEBI and the RBI to man the private placement market, which could at any time throw up some annoying fault lines.

After the 1992 scam, repo trading in the securities market was banned and, today, the RBI is trying to create a repo market for corporates and others, leaving the inter-bank market free for banks and Primary Dealers. If banks can extend loans to corporat es against hard-to-dispose collateral, it cannot be a sin if they extend funds against equity of the corporate world. Debt and equity markets are equally risky and if today matters have gone awry, it is less due to the absence of rules and more due to th eir poor enforcement. Tougher laws, it follows, will not work any better.