RBI norms force banks to keep off venture funds

Banks are excellent collectors of surplus money in the economy. While debt funding is what they do, they become exceptionally risk averse, when they have to do equity funding, mainly due to possible losses (high mortality rates) and their repurcussions especially CVC related issues. Bankers are used to security based lending and funding based on zero security, NIL promoters' contribution etc and then facing the music if the venture fails are avoidable hassles. In that context, VC funds serve a good purpose of being wonderful vehicles to channelise the funds available with the banks and use it for boosting the entreprenuerial activity by funding start-ups/early stage/growth stage investments, without the banks (and bankers) themselves getting involved in the investment/day-to-day monitoring/exit. RBI's decision would make fund raising difficult in future. Will it be reviewed?

Regards.

- Dilip.

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Source: Business Line, 12-06-2006

RBI norms force banks to keep off venture funds

Priya Nair

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No VCs please
The RBI has also asked banks to include investment in venture funds as part of their parabanking activities' exposure limit.
Investment in venture funds forms a negligible part of assets for most banks.

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Mumbai , June 11

The high-return venture capital fund investment business is now virtually off limits for banks following the Reserve Bank of India's recent guidelines.

In the annual monetary policy in April 2006, the RBI included banks' investment in such funds as part of their total capital market exposure and assigned a higher risk weight of 150 per cent to such exposures.

The banks' aggregate exposure to capital market, including investment in equities and advances to brokers is already capped at 40 per cent of their net worth.

Now that venture funds are part of this 40 per cent, there is reduced scope for banks to invest in them. Mr Luis Miranda, President and CEO of IDFC Private Equity, said that the RBI guidelines have dampened banks' enthusiasm for venture funds.

"In our first fund in 2003, the banks' share was 70 per cent. In our second fund in 2006, it dropped to 10 per cent. LIC and banks are two of the big group of investors. Of these, one has been effectively killed. So, now we have to depend more on overseas investors."

The RBI has also asked banks to include investment in venture funds as part of their parabanking activities' exposure limit.

These investments would now be included as part of banks' investments in other banks and their own subsidiaries.

This makes it difficult for large banks with overseas subsidiaries, like Bank of Baroda and SBI, to invest in them.

A senior official with a public sector bank said, "Banks would prefer to invest in their own subsidiaries because it is a growth path and a means to establish presence. As against this, investment in a venture fund is merely a commercial return. So, banks will now definitely think twice before investing in a fund."

Investment in venture funds forms a negligible part of assets for most banks, according to official with a leading venture fund.

Domestic funds account for only about 15-20 per cent of the total venture funding in the country. The share of all banks put together may be in the region of 40-50 per cent of domestic funds, he added.

"I would estimate that investment by all banks together form just about $300-400 million."

However, he added: "We already felt the pinch in our fund raising. But we realised there was no point in trying to convince banks. While investment in venture funds may not make much sense for banks from the point of view of short-term returns, they could look at it in a more strategic way. There are linkages such as corporate finance, credit relationship with the company, and so on."

Mr N. Balasubramanian, Chairman and Managing Director of SIDBI, said that he that hoped the institution would be given some freedom, as it is a developmental institution.

"Regarding venture funds, now we are cautious and will invest only if it will definitely help developmental activities. Unlike a private equity fund, our purpose is not to make money. Therefore, we should be given some freedom and plan to take up the issue with the RBI."

SIDBI has been active in private equity funds like IDFC and ILFS, State funds, and its own SIDBI Growth Fund.

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