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Cash-strapped brokers in trouble
N Mahalakshmi in Mumbai
 
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May 23, 2006 12:38 IST
Cash-strapped brokers are facing a problem as banks have stopped providing credit against pay-out slips, market players said on Monday.

For the past 4-5 days banks have refused to provide any line of credit against pay-out orders issued by exchanges.

Pay-out instructions are issued after the broker has sold shares on the exchanges and is awaiting the cash from the clearing house.

Till last week, banks used to lend a minimum 60 per cent of the pay-out amount due to brokers as the payment was assured by the exchanges. But with the sharp increase in volatility and fears of a payment crisis looming large, banks are unwilling to stick their neck out.

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While the day's pay-in and pay-outs are netted out by the exchanges, transactions with a day's lag are not netted out.

For instance, if a broker buys share on Monday his pay-in is due on Wednesday, while if he sells on Tuesday his payment from the exchanges is due on Thursday.

Banks used to fund pay-out once the sale is made on the exchanges on the confidence that the money would surely come back from the exchange.

"Our bankers have stopped providing any credit against pay-out orders on the pretext that they do not trust the exchanges," chief executive officer of a leading broking firm, which banks with two of India's leading private sector banks in the country, said on the condition of anonymity.

Brokers also said there were some problem faced with clearance of high value cheques. "The Finance Minister may be saying that banks will provide liquidity but the ground reality is vastly different," said another broker with the Bombay Stock Exchange.

According to brokers, the tightening of screws by banks and exchanges to ensure smooth payments is actually only adding to the crisis at the brokers' end. Since brokers are already cash strapped, the margin pressures are getting compounded by the tough stance taken by banks.

The Reserve Bank of India [Get Quote] stepped in to give an assurance that the financial system was robust enough to absorb the impact of the equity market's downhill path.

"In light of the developments in, the RBI has been in touch with major settlement banks and exchanges to ensure that the payment obligations are met smoothly," the RBI said.

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