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Money & Banking - Private Banks


`Draft norms on crossholdings may hit hard bank stocks'

Our Bureau

`If overnight large chunks of these cross holdings of equity are forcibly off-loaded into the markets, the prices of these scrips would plunge dramatically'.

Kochi , July 7

BANKS such as Federal Bank, South Indian Bank, Bharat Overseas Bank could be the inadvertent victims if the RBI draft guidelines on private sector banks equity holdings, comes into force.

Some bankers, however, maintained that private sector banks may not lose much, while investors in the capital markets could be badly scalded if the draft guidelines came into force. Coming as it were, just before the enforcement of the Basle II capital requirement norms for Indian banks, some said that it would have a cascading impact on the operations of the banks as well.

Cross holding of equity between banks such as Federal Bank, South Indian Bank, ICICI Bank and Bharat Overseas Bank were undertaken with the knowledge of the RBI. But if overnight large chunks of these cross holdings of equity are forcibly off-loaded into the markets, the prices of these scrips would plunge dramatically, bankers warned.

ICICI Bank holds around 21 per cent stake in Federal Bank and 11 per cent stake in South Indian Bank.

Bharat Overseas Bank was formed with equity participation from Indian Overseas Bank, Karnataka Bank, Bank of Rajasthan, ING Vysya Bank, Federal Bank and South Indian Bank.

According to the draft guidelines, these cross holding of equity will have to be sold in the capital markets. The raft regulations come just when the RBI has begun the exercise of asking the banks to prepare their own road map for complying with the Basle II capital requirement normsexpected to come into force from 2006.

There is no way that the banks would be able to abide by the revised capital norms through resource mobilisation from Tier II capital and internal generations alone, bankers said. The capital markets are perceived as an economic and viable alternative source for accretion of capital.

Sources in Federal Bank and South Indian Bank did not want to comment on the issue stating that the proposal is still in the tentative draft stage.

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