Loan Limits

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