“The growth of a strong and well governed capital market is vital. Individuals should follow the discipline of investing through savings and not leveraging,” said S S Mundra, Deputy Governor, RBI, at a special session on ‘Financing for Capital Markets’ at CAPAM 2015 recently.
He further added that individuals should invest through institutional routes, and the institutional investors themselves should be disciplined in their investment strategy. However, he cautioned that fund managers sometimes show weakness of judgement, and there is a risk in shifting from the banking to the shadow banking sector.
Mundra highlighted the supporting measures put in place by the RBI for the debt market. In 2014 banks were allowed to issue non capital long term bonds with certain caveats. In November 2014 banks were also allowed to extend loans to individuals against bonds, in order to create liquidity in the retail bond market.
In June 2015 they were allowed to invest in long term bonds of other banks with certain caps. As recently as September 2015, banks were allowed to provide credit enhancement in order to support the corporate bond market. Such facilitating measures have been provided for debt-related markets.
As far as equity-related instruments are concerned, an institutional bank’s exposure to capital markets should not exceed 40% of its net worth. Within that limit, 20% can be for direct equity, mutual funds, own investments and venture capital. Other than that, finances against shares are permitted to individuals up to Rs 10 lakh in physical form and up to Rs 20 lakh in demat form. Individual financing up to Rs 10 lakh is permitted for IPO subscription. Banks are free to frame their own board-approved policy within the overall exposure of 40% of net worth.
It has been seen that against this 40% cap which is permitted, the banks’ total exposure is 11.36%. For NBFCs the corresponding figure is 23.56% as on March 2015. Hence the framework provided by the RBI does not pose any constraints or impediments; rather there is a cautious approach by the lenders themselves.
Why has the RBI created this framework? “I for a moment do not deny that capital markets play a very important role in long term capital formation” said Mr Mundra.
But capital markets are also subject to volatility. The reasons for volatility could be economic, political, global events or market sentiments. It is to guard against such risks that the RBI has created a safety framework.
Mr Mundra felt that investing through institutional routes is better because markets have become more complex, and institutional investors have the wherewithal to carry out detailed analyses.
“Even climate exposure risk may be a factor influencing the ability of a company to borrow from the market,” he pointed out, highlighting that these complexities would be beyond the scope of individual investors.
He was of the opinion that India’s demography, education level, urbanisation and its recent inclusion drive would all open up large avenues for the growth of capital markets.