Mumbai: Banks will have to set aside capital on thousands of crores of funds they lend to corporates, brokers, investment managers and even clearing houses during the day. The move will impact several private sector and foreign banks, whose capital requirement will increase. Better known as intra-day lines of credit – or “over-the-day overdrafts” (DLOD) – these lines of credit are granted occasionally for a few hours, where the borrower repays the money before the end of the trading hour.
Today, such exposures are not reported by banks, no risk weight is assigned to the credit, the facilities are not evaluated, and in a predominant number of cases no interest is charged by banks on these intra-day overdrafts. Thus, DLODs – “closed before the end of the day” in banking parlance – are never declared in a bank’s total loan number. This has been the practice for decades.
“This will change now. During their inspection, RBI officials made it clear to banks that capital should be allocated to the DLODs, besides documenting and reporting them,” a senior banker told ET.
The regulator, according to banking circles, probably thinks that many corporations use DLODs to manage their treasures and park the excess in mutual funds, resulting in a strain in liquidity in the money market. In addition, RBI is turning to the view that capital should be earmarked against such intraday credits, as they may have systemic implications, thanks to growth in markets and growth in trading volumes. In addition to companies, investment funds take DLODs to handle redemption outflow to investors and stockbrokers use it while waiting for receipt of money from share buyers, or in furnishing derivatives trading margin in the morning or to pay for spot trades of institutions in case of mismatches.