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The Reserve Bank of India (RBI) has prescribed tighter norms for non-banking financial companies (NBFCs) to lend against shares. The move is aimed at tackling volatility in the capital market due to offloading of shares by NBFCs.
Now, for loans against shares, financial companies will have to maintain a loan-to-value (LTV) ratio of 50 per cent.
“The principle seems to be to bring in place some alignment...There might be a limited short-term impact; but overall, it should not have too negative an impact,” said R Venkataraman, co-promoter and managing director of India Infoline.
The total capital market-related loan book of NBFCs is estimated at Rs 35,000 crore, sources say. Of this, margin funding is said to account for Rs 5,000-8,000 crore; the rest is accounted for by promoter financing.
In the past, there have been attempts to address the margin-financing loophole that NBFCs with capital market exposure sought to exploit. Rules framed by the Securities and Exchange Board of India (Sebi) allowed brokers to provide only 50 per cent margins to customers. Many brokerages with NBFC arms allow them to trade with 20 per cent margins. This raises their leverage from twice the amount they put up as collateral to five times.
The NBFC route allowed brokerage groups to use the regulatory grey area, as NBFCs are regulated by RBI, not Sebi.
When share prices fall below a certain level, NBFCs sell the shares against which they lend. Often, this results in sharp falls in a company’s stock. Though NBFCs had internal controls for lending against shares, including an LTV ratio, there were instances of volatility in the capital market due to offloading of shares by NBFCs, RBI said in statement.
Financial companies could accept only group-I securities as collateral for loans valued at more than Rs 5 lakh, the central bank said, adding it would review this norm.
Now, NBFCs with an asset size of more than Rs 100 crore will have to inform stock exchanges about the shares pledged in their favour by borrowers seeking to avail of loans.
There have been instances of NBFCs being overexposed to certain stocks, as well as borrowers being overleveraged. Currently, lending against shares by NBFCs isn’t subject to specific norms, apart from the general regulation of all NBFCs.
WITH A RIDER
- Under the new rules, NBFCs will have to maintain a loan to value (LTV) ratio of 50 per cent all along on loans given against shares
- RBI says companies can accept only group-I securities as collateral for loans of value more than Rs 5 lakh
- NBFCs with asset size of Rs 100 crore and above will have to report online to stock exchanges about shares pledged with them by borrowers for availing loans
