RBI HIKES MARGINS ON LOANS AGAINST SHARES

Stock brokers and retail investors will have to fork out more to borrow from banks for investing in shares.

With the sensex touching a new high, the Reserve Bank of India (RBI) hiked the margins borrowers have to keep with banks for loans against shares and investments in primary equity issues.

The move is aimed to protect banks, which fund such investments, against a sharp drop in share prices. It comes a week after the regulator voiced its concern over the huge FII inflow, and hinted that a chunk of the foreign portfolio investments in Indian stocks could be "temporary" in nature.

The RBI has increased, with immediate effect, margins on all advances against shares, initial public offerings and issues of guarantee. From now on the margin requirement for these advances will be 50%, against 40% earlier.

This means that a borrower who raised, say Rs 30,000 against a collateral of shares and fixed deposits worth Rs 50,000, would now be entitled for a loan of Rs 25,000. If the markets move up and the value of the collateral rises to Rs 60,000 there would not be any need for any additional collateral.

But the RBI's measures did not dampen the enthusiasm in the stock market on Tuesday. The sensex closed at 6563, a 50-points rise over the previous close.

For those who raised loans earlier this month the general rise in share prices will reduce the need for bringing in additional capital. But the new guidelines will mean that banks cannot give additional loans to borrowers against existing collaterals.

The RBI has also advised banks to raise the minimum cash margin of 20% to 25%. This means that the overall margin must have a 25% cash component, which could be in the form of fixed deposit certificates, while the balance would be shares valued at the current market price.

Among the domestic players, HDFC Bank is the most aggressive in its capital exposure. The announcement reverses the relaxations for loans against shares that were announced in May '04.

Bankers do not see this as a warning but as a standard precautionary measure. "This is a good thing considering that share prices have risen substantially," said V Vaidyanathan, senior general manager and head of retail products, ICICI Bank. He added that customers would be asked to bring in additional collateral or have their loan limits reduced.

Last week in its report on Currency and Finance, the RBI cautioned against the effect of large capital flows on the prices of domestic assets, stating these flows are often feed speculative transactions in real estate and stocks. In this context, the RBI had also said that "permitting unbridled appreciation of the exchange rate during periods of heavy capital inflows can be a harbinger of a future financial crisis."