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New private banks issued high guarantees to brokers: RBI

New private banks appeared to have gone overboard on providing bank guarantees on behalf of stock brokers even a few months before the detection of the stock market scam in March.

An RBI report found that new private banks gave guarantees worth Rs 14.42 billion on behalf of stock brokers as on December 31, 2000, as against Rs 5.37 billion worth of such guarantees given by nationalised banks during the period which was few months prior to the detection of the stock scam early this year.

Reserve Bank of India in its report on the queries of the Joint Parliamentary Committee said prior to its May 11, 2001 circular, the board of directors of banks were given the authority to fix the ceiling on aggregate advances to stock brokers including bank guarantees.

The banks, however, were required to assess the requirement of the stock broker and observe prudential safeguards while issuing these guarantees, it said.

The RBI-Sebi technical committee, thereafter, in its reviews brought in stringent conditions, it said.

The guidelines on bank financing of equities and investment in shares issued in November 2000 on the basis of the recommendations of the committee stipulated a minimum margin of 25 per cent (including cash margin) for issue of bank guarantees on behalf of stock brokers.

These instructions were further reviewed by the RBI-Sebi Technical Committee in April, 2001 and based on the recommendations, revised guidelines were issued to banks on May 11, 2001, says the RBI.

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