A volatile stock market has forced the RBI to tweak the rules of banking. It has told banks that stocks can no longer be considered as collateral against loans for calculating the Capital Adequacy Ratio (CAR), the minimum capital that banks have to set aside to give loans.
Bankers said that this will not only affect corporates planning to raise long-term loans but also investors and brokers who borrow money against shares. With CAR being at 9 per cent now, a bank has to set aside Rs. 9 as capital for Rs. 100-loan which carries a risk weighatge of 100 per cent.
A lower risk weightage, which varies from 20 per cent to as high as 150 per cent, means lower capital. Till now, if shares worth Rs. 60 are pledged for a loan of Rs. 100, banks had to provide capital for the balance Rs. 40, depending on the rating of the borrower. Now, even if shares are given as collateral, banks have to set aside capital for the entire loan of Rs. 100.
RBI fears that a slide in the market could seriously erode the value of collateral held by banks. Since its new high, the BSE Sensex has fallen 30 per cent till date to 15,587 in a span of two and half months.
For banks this would mean that they will have to set aside higher capital than they had estimated earlier during the year.
Since equity is not included in the list of collaterals, several banks have raised the matter with RBI. Borrowers, specially those taking loans for core projects, will have to arrange for other forms of collateral.
In case of projects like road and port done on a built operate and transfer basis, promoters tend to pledge their equity stake. Collateral in case of a telecom company is also equity besides cell sites.
Already the capital charge under Basel II (which came into effect from March 2008) is far more stringent than in case of Basel I. However, under the Basel I norm, equity was not recognised as collateral. Thus banks are back to square one. Some relaxations which were thrown in Basel II have now been taken away.