RBI curbs loans extended to brokers in blow to proprietary trading volumes | Markets News
By Chiranjivi Chakraborty
India’s central bank has tightened rules on loans taken by firms that engage in private trading in shares and commodities and offer leverage to clients; This is the latest measure aimed at curbing speculative market activity in the South Asian country.
All credit facilities to securities firms will have to be backed by collateral, while lending for trading on their own accounts or investments by brokers will be prohibited, according to a statement published on the Reserve Bank of India’s website late Friday. So-called prudential rules for capital markets intermediaries such as stock and commodity brokers will come into force from April 1, the central bank said.
Tighter measures would increase the cost of private trading firms raising capital and squeeze profits. While Indian banks have traditionally not directly financed proprietary trading, the directive closes a loophole that allowed short-term working capital loans granted by banks to be channeled into trading by brokers.
Last year, more than 50 percent of stock option turnover on the National Stock Exchange of India Ltd., the country’s largest stock exchange, was covered by private trading firms, data show. Their share in cash share trading touched a 21-year high of nearly 30 per cent on the NSE.
The latest move comes just days after India sharply increased transaction tax on trading of single stocks and index derivatives in a bid to curb speculative trading. With the central bank’s new rules, market participants fear that the rules will hurt volumes.
The RBI has also asked banks to require that guarantees given by them on behalf of a broker for private transactions be fully secured, with 50 per cent of the collateral being in cash and the rest in cash equivalents and government securities. The new rule will narrow the type of securities that trading firms can offer as collateral to banks.
The central bank also tightened lending rules on the margin trading facility where stockbrokers offer leverage to their customers. All loans given by banks for the product will need to be secured by cash and other liquid securities. The stocks offered by brokers as collateral will be evaluated at a 40 percent valuation discount.
The margin trading facility has grown rapidly to become a more than ₹1 trillion ($11 billion) market for stockbrokers; Here, clients can leverage up to five times their capital.
