Why in the News?
The Reserve Bank of India released draft “Capital Market Exposure Directions, 2025” to overhaul rules on banks’ exposure to capital markets.
What is Capital Market Exposure (CME)?It simply means how much a bank is involved in the stock market and related financial activities. When banks deal with the capital market, they can do this in two main ways:
Because the stock market goes up and down, these activities are riskier than normal banking (like giving home or business loans). So, the Reserve Bank of India (RBI) keeps a close watch and sets limits on how much banks can invest or lend in the capital market. |
About Draft Norms on Capital Market Exposure, 2025:
- Objective: To modernise, unify, and simplify rules on banks’ capital-market lending and investment exposures.
- Expanded Scope: Permits acquisition-finance lending for corporates and higher credit limits for individuals participating in Initial Public Offerings (IPOs), Follow-on Public Offerings (FPOs), and Employee Stock Option Plans (ESOPs).
Key Features of the Draft CME Norms:
- Exposure Limits:
- Direct exposure (investments + acquisition finance) capped at 20 percent of Tier-1 capital on solo and consolidated bases.
- Aggregate exposure (direct + indirect) capped at 40 percent of consolidated Tier-1 capital.
- Acquisition Finance:
- Banks may finance up to 70 percent of acquisition cost, with borrowers contributing 30 percent equity from own funds.
- Permitted only for listed companies with sound financials and independent valuations compliant with Securities and Exchange Board of India (SEBI) norms.
- Aggregate acquisition-finance exposure limited to 10 percent of Tier-1 capital; not allowed for Non-Banking Financial Companies (NBFCs), Alternative Investment Funds (AIFs), or related parties.
- Individual Market-Participation Loans:
- Maximum loan per individual increased to ₹ 25 lakh; up to 75 percent of subscription value may be financed with a 25 percent margin.
- Shares allotted under IPOs, FPOs, or ESOPs must be pledged and lien-marked to the lending bank.
- Loans Against Securities:
- Capped at ₹ 1 crore per individual for eligible securities (government securities, mutual-fund units, listed shares, or high-rated corporate debt).
- Banks must maintain prudent LTV ratios and adopt internal risk-control systems for valuation and monitoring.
Need for Such Norms:
- Modernisation: Replaces fragmented rules with a unified prudential framework.
- Corporate Expansion: Enables M&A financing, supporting Indian firms’ global competitiveness.
- Retail Participation: Encourages individual investment and deepens equity-market access.
- Risk Containment: Exposure caps and buffers ensure stability and discipline in bank lending.
- Global Alignment: Harmonises with Basel III and international acquisition-finance standards.
- Economic Impact: Enhances financial depth, liquidity, and investment-led growth in capital markets.
| [UPSC 2023] Which one of the following activities of the Reserve Bank of India is considered to be part of ‘sterilisation?
Options: (a) Conducting ‘Open Market Operations’ * (b) Oversight of settlement and payment systems (c) Debt and cash management for the Central and State Governments (d) Regulating the functions of Non-banking Financial Institutions |
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