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Tighter RBI norms

T. R. Anandan, e-mail

The Reserve Bank of India's decision to clamp `Tighter norms for banks lending in capital market' (Business Line, April 24) is a welcome step. The decision should have come earlier since banks are capable of falling prey to brokers tricks and could lose heavily. The decisions regarding advances on securities are highly risky since the fluctuations in share prices could erode the scrips' security value. In the past year, some scrips values have fallen sharply. The risk is not commensurate with the income accruing out of the advances.

However, direct investments by banks in equity shares, convertible debentures and units of equity-oriented mutual funds could be undertaken in a restricted manner with strict guidelines, stipulating that a thorough appraisal of the equity issue with refe rence to the likely performance of the industry on completion and recommendation by a competent bodies such as the SEBI, are made a precondition. This should also cover the justification for premium when the equity is with premium.

It should be noted that capital market operations are of a highly specialised nature and any exposure to it should be after much consideration.