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New proposals unlikely to spur investment

N. S. Vageesh

CHENNAI, Sept. 6

THE recent recommendations issued by the RBI-SEBI committee on banks' investments in equity, debentures and mutual funds are a mixed bag.

The ceiling on investments in equity during a year, which was hitherto linked to incremental deposits (5 per cent), has now been proposed to be linked to outstanding advances. While, theoretically, this ought to release a significant amount for investmen t, it may not turn out to be so in actual practice.

Banks have barely used even the existing avenues available. If we take SBI, for instance, the bank's incremental deposits in 1998-99 were of the order of Rs. 37,950 crores, which gave it the flexibility to invest Rs. 1,897 crores in equities in 1999-2000 alone. But the bank's total investment in shares stood at only around Rs. 1,154.68 crores at end-March 2000.

The committee seems anxious to raise banks' exposure to the capital market over the long term on the grounds that it will impart greater stability to the market.

It has suggested that banks route their investments (up to two-thirds of the eligible limit) through mutual funds if they do not themselves possess the expertise.

It is conceded that banks have not really done much trading in the secondary market. Yet, there is a suspicion among some bankers that this clause is more to protect the mutual fund industry and ensure a steady flow into schemes such as those of UTI's fo r instance.

Though the committee claims that the mutual fund industry has reached a stage of maturity, it is doubtful if bank regulators/vigilance authorities will view with equanimity, a bank investment in a mutual fund turning bad because of market conditions.

Talking to a cross-section of bankers, one gets the impression that the recommendation is not about to open the floodgates of bank investments in shares or mutual funds. Bankers, however, see these guidelines as providing a bit more elbow room.

With credit not picking up to the desired levels and investments in debt having suffered some reverses recently, new avenues for deployment are welcome. They concede that the current period may, in fact, be an opportune time to invest since the markets h ave been down recently.

The statements by leading market players (for instance the UTI Chairman) that a rally is in the offing, also appears to be encouraging them. But whether bankers will take the plunge remains to be seen.

A positive feature of these recommendations is the barring of financing of NBFCs for onlending for IPOs and the barring of finance to corporates for investment in IPOs. Bankers, however, say that nearly 40-45 per cent of the subscription in the primary m arket in many recent issues, especially from the infotech sector, was due to the presence of IPO financing by banks.

They say that the recommendations could affect this segment of the primary capital market and the level of subscription or oversubscriptions that were seen in the past may not happen in future.

The fixing of a minimum margin of 25 per cent for guarantees to brokers is again a welcome step because there was no uniform practice in this matter by banks. Bankers, however, caution that monitoring the brokers' position is difficult and a bank's funds will continue to be at some risk because of this.

Higher margins in the region of 50 per cent and above (for which bank boards will have to take a decision) have to be fixed to mitigate risk, they say.