RBI prescribes tighter norms for NBFC to lend against shares
RBI prescribes tighter norms for NBFC to lend against shares
The Reserve Bank of India has prescribed rules including loan to value ratio for non banking finance companies (NBFCs) to lend against shares. The banking regulator took this step to avoid volatility in capital market triggered by offloading of shares by NBFCs.
Under new rules, finance companies will have to keep Loan to Value (LTV) ratio of 50% all along to loans given against shares.
The total capital market-related loan book of NBFCs has been estimated to be at Rs 35,000 crore, according to market sources. Margin funding is said to account for Rs 5,000-8000 crore, with the rest of it related to promoter financing.
"The principle seems to be to bring in place some alignment...There may be a limited short-term impact but overall, it should not have too much of a negative impact," said R Venkataraman, Co-Promoter and Managing Director of India Infoline.
There have previously been attempts to address a margin-financing loophole which NBFCs with capital market exposure sought to exploit.
Rules framed by Securities and Exchange Board of India only allowed for brokers to provide 50% margin to their customers. Many brokerages with NBFC arms allow them to trade with 20% margin. This effectively raised their leverage from two times the amount that they put up as collateral, to five times.
Essentially, you could take an exposure of Rs.400 with Rs.200 under the Sebi rules. Through an NBFC, this exposure could go up to Rs.1000. The NBFC route allowed brokerage groups to use a regulatory gray area, since NBFCs fall under RBI's jurisdiction and not that of SEBI.
When share prices fall below a certain level, NBFCs sell the shares against which they have lent money. This often results in sharp downward movements in the company's share price. NBFCs have in place their own internal controls for lending against shares including a loan to value (LTV) ratio. But there are anecdotal evidences of volatility in the capital market being the result of offloading of shares by NBFCs, RBI said in statement.
RBI said finance companies can accept only group I securities as collateral for loans of value more than Rs five lakh and it would review this norm.
NBFCs with asset size of Rs 100 crore and above will have to report on-line to stock exchanges, information about shares pledged in their favour, by borrowers for availing loans.
Default by borrowers can and has in the past lead to offloading of shares in the market by the NBFCs creating avoidable volatility in the market. There are also concerns like absence of adequate prior information to the stock exchanges on the shares held as pledge by NBFCs and probable overheating of the market, RBI said
There have also been instances of over-exposure by NBFCs to certain stocks and overleveraging of borrowers. At present, lending against shares carried out by NBFCs is not subject to specific instructions apart from the general prudential regulation for all NBFCs. Lending against shares could be in the normal course where shares are accepted as collateral or as part of their capital market operations.
NBFCs lend either by way of pledge of shares in their favour, transfer of shares or by obtaining a power of attorney on the demat accounts of borrowers, RBI said.
Business Standard
Thanking you
Regards,
Rajesh Kumar Kathpalia ¤ SMC Global
17,Netaji Subhash Marg,Daryaganj,
New Delhi-110002 Mobile No 9891645052
Email Id: rajesh.ipo@smcindiaonline.com
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The Reserve Bank of India has prescribed rules including loan to value ratio for non banking finance companies (NBFCs) to lend against shares. The banking regulator took this step to avoid volatility in capital market triggered by offloading of shares by NBFCs.
Under new rules, finance companies will have to keep Loan to Value (LTV) ratio of 50% all along to loans given against shares.
The total capital market-related loan book of NBFCs has been estimated to be at Rs 35,000 crore, according to market sources. Margin funding is said to account for Rs 5,000-8000 crore, with the rest of it related to promoter financing.
"The principle seems to be to bring in place some alignment...There may be a limited short-term impact but overall, it should not have too much of a negative impact," said R Venkataraman, Co-Promoter and Managing Director of India Infoline.
There have previously been attempts to address a margin-financing loophole which NBFCs with capital market exposure sought to exploit.
Rules framed by Securities and Exchange Board of India only allowed for brokers to provide 50% margin to their customers. Many brokerages with NBFC arms allow them to trade with 20% margin. This effectively raised their leverage from two times the amount that they put up as collateral, to five times.
Essentially, you could take an exposure of Rs.400 with Rs.200 under the Sebi rules. Through an NBFC, this exposure could go up to Rs.1000. The NBFC route allowed brokerage groups to use a regulatory gray area, since NBFCs fall under RBI's jurisdiction and not that of SEBI.
When share prices fall below a certain level, NBFCs sell the shares against which they have lent money. This often results in sharp downward movements in the company's share price. NBFCs have in place their own internal controls for lending against shares including a loan to value (LTV) ratio. But there are anecdotal evidences of volatility in the capital market being the result of offloading of shares by NBFCs, RBI said in statement.
RBI said finance companies can accept only group I securities as collateral for loans of value more than Rs five lakh and it would review this norm.
NBFCs with asset size of Rs 100 crore and above will have to report on-line to stock exchanges, information about shares pledged in their favour, by borrowers for availing loans.
Default by borrowers can and has in the past lead to offloading of shares in the market by the NBFCs creating avoidable volatility in the market. There are also concerns like absence of adequate prior information to the stock exchanges on the shares held as pledge by NBFCs and probable overheating of the market, RBI said
There have also been instances of over-exposure by NBFCs to certain stocks and overleveraging of borrowers. At present, lending against shares carried out by NBFCs is not subject to specific instructions apart from the general prudential regulation for all NBFCs. Lending against shares could be in the normal course where shares are accepted as collateral or as part of their capital market operations.
NBFCs lend either by way of pledge of shares in their favour, transfer of shares or by obtaining a power of attorney on the demat accounts of borrowers, RBI said.
Business Standard
Thanking you
Regards,
Rajesh Kumar Kathpalia ¤ SMC Global
17,Netaji Subhash Marg,Daryaganj,
New Delhi-110002 Mobile No 9891645052
Email Id: rajesh.ipo@smcindiaonline.com
--
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To unsubscribe from this group and stop receiving emails from it, send an email to Productupdatesforamc+unsubscribe@googlegroups.com.
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