Sebi ban on pledging clients' funds to take a toll on bank guarantees: Analysts

Sebi

The Securities and Exchange Board of India (Sebi) prohibiting stockbrokers from deploying client funds to create bank guarantees (BGs) for themselves is likely to impact, albeit marginally, the business of banks on the BG front in the near term, analysts said.

The major impact will be on stock brokers who were using this mechanism for their benefit, they added.

"It will have an impact on bank guarantees, but that will be marginal considering the size of the banking system in India," Sanjay Agarwal, Senior Director, CARE Ratings, said.

"The proportion of the bank guarantees issued to stock brokers compared to the overall bank guarantees issued in the banking system is low. Hence, the impact on the banking system could be marginal," said Suresh Kishinchand Khatanhar, Deputy Managing Director of IDBI Bank.

In a BG, the bank assures timely payment of the debtor’s obligation. In other words, the bank undertakes to pay the loan if the borrower is unable to do so.

According to experts, of the total BGs issued in the market, BGs issued to stock brokers and clearing members (CMs) comprise just 2.5-3 percent.

What did Sebi say?

Sebi, in its circular, directed that from the beginning of May, no new BGs will be created out of client funds by stock brokers and clearing members (CMs). Secondly, existing BGs created out of client funds will be wound down by September 30 of this year.

The markets regulator has also clarified that the provisions of this framework shall not be applicable to proprietary funds of stock brokers and CMs in any segment. Any proprietary funds of the stock broker deposited with a CM in the capacity of a client will also not attract the provisions of this circular.

Further, stock exchanges and clearing corporations (CCs) will also have to take on the burden of additional monitoring and reporting.

Exchanges and CCs will have to submit collateral data which will concern itself with further classifications, namely, the total amount of BGs raised as collateral by a broker or CM, the portion marked as client funds out of the total BGs raised, and the total portion marked as proprietary funds out of the total BGs raised from June 1.

Working capital requirements

Experts are of the view that the Sebi move will increase the working capital needs of stock brokers, which may force them to turn to banks for assistance, which, in turn, could nullify the impact of the cut in BGs.

“On the other hand, with the new regulations, the working capital of stock brokers will increase and they may seek bank assistance,” Khatanhar said.

But, some experts believe small brokers, who are fully dependent on client funds, will be impacted. They will now have to rely on external borrowings and internal accruals for working capital needs.