The Reserve Bank of India is understood to have initiated an informal enquiry into the books of some banks and non-banking finance companies allegedly involved in illegal financing of initial public offerings.

According to banking sources, a few new generation private banks are marketing personal loans to retail investors to invest in stocks.

While the enquiry follows a complaint lodged with the RBI, the mode of IPO financing is limited to select banks as most have conservative board rules for investment related to equity market. No formal investigation has been done yet and the enquiry is on a limited scale, banking sources said.

Under the modus operandi, two or three banks are extending personal loans to retail investors to participate in the IPOs.

In the process, the accounts for subscription and allotment for shares under IPO is to be maintained with the said bank, which is extending the loans.

Thereafter, as and when the investor is allotted the shares, the loan is transferred as loans against shares, which is a legal entry under RBI norms.

Under the notified route, banks are allowed to extend loans up to Rs 10 lakh (Rs 1 million) against a collateral of physical shares and Rs 20 lakh (Rs 2 million) against pledged demat shares.

However, banks are not allowed to extend uncollateralised personal loans for acquisition of shares and enter into speculative business.

Another route adopted by banks is to lend to NBFCs, which in turn, are financing retail participation in the IPOs. NBFCs have been barred from offering loans for participation in the stock market without any collateral.

Sources added that some banks have also represented for reviewing the limit for bank's investment in equity markets, which is currently at 5 per cent of the incremental time and demand liabilities.