Public sector banks are increasingly looking at promoter funding as a business opportunity when others are shying away from it.

Though banks are not ready to come out in the open about this activity as yet, market analysts indicated that in the last couple of months, companies have raised around Rs 5,000 crore (Rs 50 billion) from banks mostly by issuing rated papers and some of them have also offered shares as collateral for additional line of credit.

"It is more logical to lend directly to promoters, taking shares as additional collateral, rather than lend to NBFCs (non-banking finance companies) which are into promoter funding," said a public sector bank executive.

Some of the NBFCs, which were pioneers in the business of loans against shares, are also referring their clients to public sector banks. With the cost of funds hovering around 15-17 per cent for NBFCs, margin funding is no longer a viable proposition and this is where the state-owned banks, whose prime lending rates are around 12-12.5 per cent, are stepping in.

The move is significant as traditionally, for public sector banks, direct capital market exposure was limited to IPO funding and loans to individual stock brokers.

Executives with a Mumbai-based finance company, involved in promoter funding said the size of this business was estimated to be Rs 20,000 crore (Rs 200 billion) before the liquidity issues cropped up.

"A large pie in this segment was controlled by NBFCs floated by foreign banks. Following the global meltdown, liquidity came under severe stress. The borrowings rates shot up and changed the cost-benefit equation. It became very difficult to raise funds at reasonable rates. The cost of borrowing was above 15 per cent and these resources were deployed around 19 per cent," said an executive with Edelweiss Capital.

Some of the finance companies in this business are referring their clients to banks including some public sector banks since they cannot offer competitive rates, he added. Now, banks are also finding it easier to lend to such corporate directly, as they are not permitted to lend to any entities which are on-lending for capital market activities (in this case promoter funding).

"Public sector banks are lending to some NBFCs but those loans are mostly for working capital needs, not for business expansion, in line with the series of steps taken by RBI and government. Banks are uncomfortable to lend for business expansion as there are apprehensions regarding the asset quality of these companies. So, in this scenario promoters' shares may provide a necessary comfort," said the head of an NBFC.

However, according to an analyst, the issue of constant monitoring of stocks might be an area of concern for the public sector banks.

"Public sector banks were not keen in the past about loans against shares as it required a constant monitoring of the market value of shares, which are kept as collateral. Based on this information, they have to follow-up with the borrowers for topping up the margins when the value of shares takes a beating," he said.

Another reason for public sector banks going out of the way to help the promoters is the long standing credit relationship. "There are corporates which have good track records in the past but of late there have been some delays in payment. Since we know the clients, in this case shares can act as an additional collateral," said a senior executive with Bank of India [Get Quote].