Banks stop collateral-free intra-day funding to brokers

On Monday, banks directed the regulators to end the practice of financing stockbrokers during the day without collateral.

Intra-day funding, also known as 'daylight exposure' in banking parlance, provides brokers the facility to tide over a few hours gap pending receipt of money from stock buyers. It also enables them to furnish derivatives trade margins in the morning or pay for spot trades by institutions in case of mismatches.

Now, The RBI has asked the four large private sector banks that these intra-day credits have to be backed by a minimum margin of 50% as fixed deposits and marketable securities.

Thus the new guidelines mean that a broker drawing ₹500 crore as an intra-day fund must give collaterals of at least ₹250 crores to the lending bank.

"Brokers will have to arrange collaterals, some of the smaller ones will find it very difficult. Their cost is expected to rise. They will have to raise funds, create fixed deposits that can be given as collateral, and may in the process run a negative carry. We wonder if there is a strong rationale for this when there is a strong margin system and other checks and balances put in place by stock exchanges and clearinghouses," said one of the senior bankers.