The Reserve Bank of India [Get Quote] is unlikely to sanction higher capital market exposure limits to banks which are closer to reaching the regulatory ceiling.

The exposure of HDFC Bank [Get Quote] has already breached the ceiling of 40 per cent of net worth and a few others such as IndusInd Bank [Get Quote], UTI Bank [Get Quote], Bank of India, IDBI Bank and Development Credit Bank [Get Quote] have exposure in excess of 30 per cent of their net worth.

HDFC Bank and UTI Bank have both applied to the RBI seeking a higher capital market exposure limit and others were considering doing so.

The central bank, in its revised guidelines, has capped banks' exposure to capital markets at 40 per cent of net worth as on March 31 of the previous, both on a consolidated and a non-consolidated basis, against 5 per cent of total advances earlier.

However, the RBI had stated in its circular that it would consider banks' application seeking a higher limit based on its risk management practices.

The high capital market exposure of banks has come under the RBI's scanner. Y V Reddy, governor, RBI, yesterday indicated that the regulator will conduct supervisory review of select banks with higher exposure to the capital market.

"The central bank under the supervisory review can call for data in a orderly fashion from select banks and then seek clarification from banks in case it feels there are some concerns or breaches in the portfolio," said a senior RBI official.

Banks, that are close to breaching the regulatory ceiling, are now reviewing broker credit limits. Some brokerages, which have not been fully using their credit limits, might also be asked to lower the limits.

Bhaskar Ghose, managing director, IndusInd Bank, said, "Our capital market exposure is around 36 per cent. We have plenty of headroom. However, in future we could approach the RBI seeking its permission to increase the ceiling for the bank. Additionally, we can divert the unutilised credit limit of select brokers to those who really need it."

Meanwhile, the country's second largest private sector bank, HDFC Bank's capital market exposure as of March 31, 2007 was at Rs 34,100 crore (Rs 341 billion), which was 54.3 per cent of its net worth, on a non-consolidated basis.

Recently, the bank raised fresh capital of about Rs 4,200 crore (Rs 42 billion). "The fresh capital infusion would help the bank show the exposure within the prescribed limit (by March 31, 2008). However, it does not give the bank much headroom to expand its business. Our application seeking a higher capital market exposure limit for the bank is pending with the RBI," said a senior HDFC Bank official.

"We have applied to the Reserve Bank of India seeking a higher limit for exposure to the capital market," said M M Agarwal, executive director, corporate banking, UTI Bank.

Bank of India's capital market exposure is at around 36.95 per cent. "Considering the size of the bank we have enough headroom of about Rs 500 crore (Rs 5 billion). We can restructure the credit limit sanctioned to brokers and taking into consideration the track record of the bank and its risk management practices we could consider applying to the RBI for a higher limit," said a senior Bank of India official.