INDIA BUSINESS WORLD - JULY 2006
THE MONTH THAT WAS...

HDFC BANK GUARANTEES NOW FAIL TO PASS MUSTER AT NSE

A TUSSLE has broken out between the National Stock Exchange and HDFC Bank. The exchange has stopped accepting guarantees issued by the private bank, which by far is the most aggressive lender in the capital market.

NSE's decision, it is understood, is a result of concerns over high concentration of limits with a single bank. Over 70% of broker guarantees in the stock market is issued by HDFC Bank. Based on guarantees, exchanges set trading limits for member stock brokers.

This, the bourse fears, may pose a risk: any problem with the bank (which could be even a technical snag) could affect the entire market. HDFC Bank sources argue that no one knows the capital market business better than them, and its systems are robust enough to allay possible concerns. HDFC Bank MD Aditya Puri was out of the country and not available for comment.

When contacted, an NSE spokesperson said, “Our decision is based on the prudential norms set by Clearing Corporation...it is a routine matter.” He confirmed that while renewal of limits are allowed, fresh guarantees are not being accepted as of now.

However, bank circles said they are not aware of such norms, and these have not been spelt out to them by the exchange. “A customer interested to do business with us should not be stopped..it's a price for efficiency,” said a bank official who did not wish to be named. According to him, the bank is well within the overall capital market exposure cap fixed by RBI.

The HDFC bank brass is believed to have drawn RBI's attention to the matter. Sections in the market do not rule out the possibility that NSE has the backing of the government, which may want more banks to take up the capital market business. Bank officials also had a meeting with the more generous BSE, to discuss ways to improve volumes on the bourse. BSE continues to accept guarantees issued by HDFC Bank.

To overcome the problem, HDFC Bank had struck an arrangement with some of the large public sector banks, under which these banks issued guarantees against which the former gave a counter-guarantee and took the broker risk.