Sri Lanka restricts bank exposure to stocks

Apr 29, 2011 (LBO) - Sri Lanka's banking regulator has imposed limits on commercial bank exposure to the stock market which has been among Asia's top performing bourses in the last two years.


New guidelines issued by the central bank limits bank lending to buy stocks to less than 05 percent of total loans, with those over the new limit required to reduce exposure by March 31, 2012.

Margin trading facilities cannot exceed 50 percent of the market value of customers' share portfolios at the close of each trading day, the central bank said in a statement.

The regulator has also imposed limits on issue of guarantees to buy shares, saying they cannot exceed fifty percent of the value of initial public offerings.

The move came after criticism that small investors were being unfairly denied a chance to invest in IPOs with a spate of recent IPOs being heavily oversubscribed by big investors using bank guarantees.

The sharp rise in stock prices has also raised fears of a stock market bubble.

"The Monetary Board is of the view that excessive exposure of banks to the stock market may expose banks to systemic risks arising from possible volatility and price bubbles of assets," the central bank statement said.

"Such risks which arise from the speculative behaviour of participants of such asset markets may adversely affect the asset quality, liquidity, profitability and capital of banks.

"Therefore, the adoption of appropriate risk management standards is necessary to mitigate such risks to prudent levels and to promote the safety and soundness of the banking system.

Under the limits on credit exposures, the total on-balance sheet credit exposure of a licensed commercial bank on facilities granted to customers or investors to buy listed shares for less than one year cannot exceed five percent of the total loans outstanding as at the end of the preceding quarter.

A bank that has given credit facilities in excess of the maximum limit imposed must not grant additional facilities and reduce the excess exposure to be within the limit of five percent by March 31, 2012.

The central bank has also imposed limits on margin trading saying banks can extend margin trading facilities provided they do not exceed fifty percent of the market value of the customer's share portfolio at the close of each trading day.

All shares bought with margin trading facilities shall be under pledge to the bank providing the margin trading facility, the central bank said.

It also imposed reporting requirements with banks having to maintain details of exposure to the stock market and reporting to the director of bank supervision by the 15th day of the month following each quarter.

The director boards of commercial banks are required to draw up risk management policies, guidelines and internal controls on exposure to stock markets and assess risk exposures on an on-going basis.

The exposure of bank subsidiaries to the stock markets must also be closely monitored.

"Banks must disclose their total credit exposure to the stock market in the 'notes to financial statements' giving amounts outstanding in relation to on-balance sheet and off-balance sheet items separately," the statement said.

source - www.lbo.lk