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RBI reiterates stand on IPO financing of Banks - Views on News from Equitymaster
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  • Feb 24, 2000

    RBI reiterates stand on IPO financing of Banks

    RBI has reminded the banking sector not to exceed the 15% exposure limit on loans to the equity sector, including IPO finance, broker and share finance schemes. However at the same time it has clarified that the banking sector has not "over-extended" its exposure to initial public offering funding.

    This was announced to bankers at a meeting held yesterday, as a matter of caution and prudence by RBI. The main reason for RBI's concern being that IPO financing has resulted in many issues being oversubscribed recently.

    The concern stems from the fact that though their maybe genuine buying interest in the IPO market, many investors have over-extended themselves as they expect to get only part allotment of shares. This has lead to artificial demand in the IPO market with issues getting oversubscribed by many times.

    The banks have been asked to review their lending policies and formulate cautious lending policy for IPO investors. Also with the stock market currently in a boom phase, they have been advised to be cautious on funding broker and share finance schemes so as to avoid bad loans and benami share applications. Though the banks claim that they decide the lending limit and margin requirement after a detailed scrutiny of the application and the applicants creditworthiness.

    However this cautious approach did not have a positive impact on the stock markets yesterday. The stock market fell on rumours of strict control on bank advances of shares especially IPOs. However RBI has clarified these by stating the banks had not over-extended their exposure to this segment and is currently very much within the limits.

    The availability of IPO finance has resulted in many investors indulging in leveraged investments and has lead to increased interest in the IPO market, with many issues being oversubscribed. As RBI is concerned about the quality of issues that could spring up in the future in the IPO market as many companies will try to take advantage of this boom. Hence IPO investors need to be careful in selecting IPOs or they will be unable to pay back the banks. RBI is also concerned on the stock markets which are currently in a boom phase, however tables could turn here too. Hence if either of these segments face a slowdown/crash in future it does not want banks to be saddled with bad loans. Hence RBI as a precautionary measure is reviewing and reiterating its stance this method of financing by banks.

    The earlier 1994 IPO market crash, the 1992 stockmarket scam and the Asian crisis has made RBI more cautious in their approach to lending to this segment, hence it is taking such steps.



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