The regulator is asking banks to do away with the decades-old practice of funding stockbrokers without collateral during the day.
Intra-day funding, better known as ‘daylight exposure’ in banking parlance, is a crucial facility that enables brokers to tide over a few hours gap pending receipt of money from stock buyers or in furnishing derivatives trade margin in the morning or paying for spot trades by institutions in case of mismatches.
The Reserve Bank of India (RBI) recently informed four sizeable private sector banks that such intra-day credit in the form of fixed deposits and marketable securities would have to be supported by a minimum of 50%, two senior-most bankers told ET. Thus, a broker withdrawing ₹500 crore as an intra-day fund will have to provide collateral of at least ₹250 crores to the lending bank.
“Brokers will have to arrange collaterals; some smaller ones will find it very difficult. Their cost is expected to rise. They will have to raise funds, create fixed deposits which can be given as collateral and may, in the process, run a negative carry. We wonder if there is a strong rationale for this when there is a strong margin system and other checks and balances by stock exchanges and clearinghouses,” said one of the persons.
According to the regulation, a bank cannot have less than 10% of the total sanctioned facilities—loans, non-fund business such as guarantees, and overdrafts—a company with its current accounts, which lenders hold as zero-interest deposits. We are asked to reduce the cost of funds for the bank. Rule-hit multinational banks lobbied RBI to include intra-day credit in the calculation of ‘total facilities sanctioned.’
And, now the inclusion of daylight limits (in the form of loans) in the current account circular is changing the rules for brokers on the intra-day line, which most banks did not expect. During a regular audit of banks, RBI is separately telling them that brokers cannot have collateral-free intra-day funding,” said an industry official.
Banks notified by the Central Bank also provide custody services to foreign portfolio investors, investment trusts, and institutional investors such as insurance companies.