Banks, NBFCs not keen on financing IPOs

Banks and non-banking finance companies (NBFCs) are less than eager to lend money to retail investors seeking to invest in the current round of public offers.

In a marked departure from their earlier enthusiasm for IPO funding, banks and NBFCs are now apprehending limited oversubscription, and selling pressure in the equity market after the issues.

Market sources said one of the main reasons why banks are backing out from funding these issues is the fear that these issues will not get oversubscribed the way previous issues such as UCO Bank, Vijaya Bank, Indraprastha Gas, and TV Today were done. This means most retail investors are likely to get full allotments.

According to Prashant Joshi, head of retail assets, IDBI Bank, "we have very good level of IPO financing done in case of UCO Bank, Vijaya Bank, Indraprastha Gas, TV Today etc. However, the size of current wave of issues is huge and the scope of oversubscription is limited. Usually banks look for issues with small size but with the possibility of high oversubscription."

Ambreesh Baliga, head of research at Karvy Stock Broking, said, "Bank funding is a function of oversubscription and the higher the oversubscription, the more funding parties are interested as in such a case the risk is minimal."

However, a senior executive with a leading financial institution which is the lead manager to some of the issues said, "Bank financing generally happens on the last two days before the issue closes and if there is undersubscription, banks will increase their margins. I believe the demand for these issue will come through with or without bank financing."

Bankers under condition of anonymity added that IPO financing is driven by oversubscription and banks look forward to issues where oversubscription is expected to be at least five times. Even the NBFC are not joining the IPO bandwagon.

S K Mitra of Birla Group said, "Funding is required when the demand is high. But with the bunching of issues and the demand being limited due to high volatility, we have to increase margins to cover our risk. But to the extent there is demand, we are ready to finance."

At present, banks charge a 50 per cent margin for such loans and interest rates vary between 15-17 per cent for a period of 90 days including demat opening charges, processing fees, stamp fees, rate of interest, documentation charges etc in case of loans against new shares, said a banker. These loans come under the five per cent limit prescribed by the RBI for banks' capital market exposure.