The Telegraph
Friday , August 22 , 2014
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NBFC rule rejig to curb stock swing

Mumbai, Aug. 21: The Reserve Bank of India today tightened the rules on lending by non-banking finance companies (NBFCs) against shares held as collateral.

In a bid to bring down volatility in the capital markets, the central bank has asked NBFCs to maintain a loan-to-value ratio of 50 per cent for lending against collateral of shares. This means NBFCs cannot lend more than 50 per cent of the value of shares pledged with them.

At present, curbs are in place on brokerages, who can buy on behalf of their clients provided the latter pays up to 50 per cent upfront.

NBFCs lend either by way of pledge of shares in their favour or by obtaining a power of attorney on the demat accounts of borrowers.

The RBI has also asked the NBFCs to accept only “Group 1” securities as collateral for loans valued at more than Rs 5 lakh. These are the shares which do not move more than one per cent either ways when a tranche is sold.

“Irrespective of the manner and purpose for which money is lent against shares, default by borrowers can and has in the past lead to offloading of shares in the market by the NBFCs, thereby creating avoidable volatility in the market,” the RBI said in a notification today while explaining the move.

Market experts welcomed the development, saying there have been instances in the past where NBFCs lent aggressively against shares and later sold the pledged shares.

“It is necessary to introduce a minimum set of guidelines on lending against shares while at the same time ensuring that these do not result in unnecessary constraints to the requirements of genuine borrowers,” the RBI said.

According to the central bank, there is also an absence of adequate prior information to the bourses on the shares held as pledge by the NBFCs. Further, there are concerns regarding overexposure of these companies to certain stocks and overleveraging of borrowers.

The apex bank, therefore, has now said all NBFCs with asset size of at least Rs 100 crore should report online to stock exchanges about the shares pledged in their favour.