RBI rule out Banks can’t take stocks as security

Recently there have been significant changes in the stock market index. The sensex index went down to an unbelievable point its mark can be seen on the Indian economy. Due to this instability in the stock market has forced the Reserve Bank of India (RBI) to change the rules of banking.

The regulator has instructed the banks that seeing the frequent changes in the sensex index banks can no longer regard stocks as security against loans for calculating the capital adequacy ratio, the minimum capital that banks have to set aside to give loans.

Bankers said the change in the rule is not only going to affect corporate planning to raise long-term loans but also investors and brokers who borrow money against shares. With CAR being at 9% now, a bank has to keep aside Rs 9 capital for a Rs 100-loan which carries a risk weight age of 100%.

A lower risk weight age, which varies from 20% to as high as 150% means lower capital. Till now, if shares worth Rs 60 are guaranteed for a loan of Rs 100, banks have to give capital for the balance Rs 40, depending on the rating of the borrower. Now, even if shares are given as security, banks have to keep aside capital for the entire loan of Rs 100.

Thus according to new norms banks have to keep aside more capital. The central bank has pointed this while giving clarification on certain issues relating to Basel II, the second set of norms that measure the quantum and nature of risk banks can take.

RBI has doubts that a down fall in the market can seriously wear away the value of security held by banks. Since its new high, the BSE Sensex has fallen 30% till date to 15,587 in a period of two and half months.

After this the banks have to recalculate the CAR and keep aside more capital than they had expected earlier during the year. “The earlier guidelines on the Basel II norm issued in April 2007 said that equity can be considered as collateral. But a March 2008 circular from RBI has de recognized equity as collaratoral,” said a senior bank manager in charge of risk management.

Since equity is not included in the list of securities, several banks had to take up the matter with RBI. Borrowers, specially those taking loans for their major projects, will have to arrange for other forms of security.

However in case of projects like road and port done on a built operate and transfer basis, promoters tend to guarantee their equity stake. In case of telecom, company keeps equity besides cell sites as collateral.

Already the capital charge under Basel II (which comes into effect from March 2008) is far stricter than in case of Basel I. A PSU bank chief said under the Basel I norm, equity was not recognized as collateral. “Thus we are back to square one. Some relaxations which were thrown in Basel II have now been taken away”.