Intra-day funding, better known as ‘daylight exposure’ in banking parlance, is a crucial facility that enables brokers to tide over a few hours gap pending receipt of money from stock buyers, or in furnishing derivatives trade margin in the morning or paying for spot trades by institutions in case of mismatches.
The Reserve Bank of India (RBI) has recently communicated to four large private sector banks that such intra-day credits have to be backed by a minimum margin of 50% in the form of fixed deposits and marketable securities, two senior bankers told ET. Thus, a broker drawing ₹500 crore as intra-day fund must give collaterals of at least ₹250 crore to the lending bank.
“Brokers will have to arrange collaterals, some of the smaller ones will find it very difficult. Their cost is expected to rise. They will have to raise funds, create fixed deposits which can be given as collaterals, and may in the process run a negative carry. We wonder if there is a strong rationale for this when there is a strong margin system and other checks and balances put in place by stock exchanges and clearing houses,” said one of the persons.
Till now, such intra-day exposures to market intermediaries – unlike guarantees to a broker or longer-tenor loans to finance proprietary trades – were not considered as ‘loan’ to brokers. It largely remained a grey area as neither banks categorised it as capital market exposure nor the regulator insisted on it. However, this changed with RBI imposing conditions on banks for having current accounts of firms and companies.
According to the regulation, a bank with less than 10% of the total approved facilities-comprising loans, non-fund businesses like guarantees, and overdrafts-to a company cannot have its current accounts which are sought after by lenders as zero-interest deposits lower a bank’s cost of funds. MNC banks, which were hurt by the rule, lobbied with RBI for inclusion of intra-day credit in calculating ‘total approved facilities’. “And, now the inclusion of daylight limits (as loan) in the current account circular is changing the rule on intra-day lines to brokers in a way which most banks did not expect. RBI, in the course of routine audits of the banks, is telling them separately that there cannot be collateral-free intra-day funding to brokers,” said an industry official.
Banks which have received the communication from the central bank also offer custodial services to institutional clients like foreign portfolio investors, mutual funds and insurance companies.
Banks also take daylight exposure to MFs to enable them to arrange funds for meeting redemption orders from investors. “I don’t think RBI is concerned with such intra-day lines to asset management companies which are pass-through vehicles. But RBI has a risk aversion when it comes to bank exposure to brokers and builders. What if the client doesn’t pay? There have been broker defaults in recent years,” said a person who is aware of the regulatory stand. The RBI spokesman could not be contacted for comments.
Significantly, RBI’s directive comes about a month before some of the stocks that FPIs invest in could be included in the T+1 (or trade plus one day) settlement cycles that was introduced in end-February this year. “There is a distinct possibility that hand delivery trades (done by FPIs) could rise with T+1 and this would lead to borrowing more from banks to bridge the payment gap,” said an official with a market intermediary. Hand delivery trades arise out of mismatches between contract notes generated by brokers and the confirmation given by global and local custodians of the offshore funds. When a custodian does not confirm, the broker has to settle the trade with the clearing corporation. In such cases where the broker has to put up the money at the time of settlement, it has to borrow from banks, receives the money from the custodian once the latter receives the shares, and then repays the bank by the day-end.