HDFC Bank, the largest private sector lender, has informed securities and commodity brokers that it will not provide short-term loans (STLs) for margin purposes, sources familiar with the development. Activity area. The move comes on the heels of ongoing scrutiny by market regulator SEBI and the Reserve Bank of India (RBI) regarding the âfundedâ fixed deposit that brokers were using to benefit from trading margin.
A few private sector banks have given STL brokers on the basis of stocks and property as collateral. However, on a guarantee worth 100, the banks issued an STL of 50, and the remainder of 50 was given as a âfundedâ fixed deposit (FD). The broker used the value of 50 of STL to benefit from a higher amount of bank guarantee (BG), which together with the âfundedâ FD was deposited with the clearing company (CC) of the stock exchanges to benefit trading limits. Brokers must set up an initial margin with CCs to benefit from the trading limit, which are accepted in part in cash, BG and FD. August 2, Activity area had signaled that SEBI wanted to know the extent of âfundedâ DFs that the CCs had accepted. Apparently the RBI have also asked for details. The catch in the guarantee is that part of it might belong to the broker’s client and not be his.
Brokers fear a surge in market liquidity squeeze if some banks refuse to honor old FDs issued for margin.
âAny bank that does not honor its FD for technical reasons is a worrying development for participants in the capital market,â said Uttam Bagri, chairman of the Bombay Stock Exchange Brokers Forum.
This week, HDFC Bank and Edelweiss Custodial Services Ltd decided to resolve margin guarantee issues worth 100 crore through an arbitration process. The IndiaNivesh brokerage had suffered mark-to-market losses, which were funded by Edelweiss Custodial Services Ltd. Edelweiss was covered by STL, which was available for âcustomersâ credit balances.
IndiaNivesh announced that the amount would be “sufficient to cover creditors”. The problem started when HDFC Bank refused to honor the FD receipts it issued as a guarantee from IndiaNivesh to Edelweiss, who acted as a clearing member. Edelweiss asserted that the FDRs issued by HDFC Bank were pledged by IndiaNivesh as collateral for the whole trade, while HDFC Bank asserted that it was only margin and not value losses. market or M2M.
The National Stock Exchange has now increased the limit of BG it will accept from brokers.
HDFC Bank did not respond to an email request. However, a source close to the bank said it is still “evaluating” the STL for margin purposes and a final decision has not been made.