To check market volatility, RBI sets new guidelines for NBFCs

Written by fe Bureau | Mumbai | Updated: Aug 22 2014, 09:33am hrs
Reserve Bank of IndiaReserve Bank of India on Thursday tightened the norms for lending against shares by non-banking financial companies.
The Reserve Bank of India (RBI) on Thursday tightened the norms for lending against shares by non-banking financial companies (NBFCs), asking them to maintain a loan-to-value (LTV) ratio of 50%.

The RBI also said that NBFCs can lend only against Group 1 securities for loans worth R5 lakh and above.

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

RBI said it wants to, through these guidelines, check volatility in the capital markets that are caused by sudden offloading of shares by NBFCs. 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, RBI said.

The central bank said stock exchanges do not have any prior information regarding shares held by NBFCs as pledge. Certain other associated areas of concern relate to absence of adequate prior information to the stock exchanges on the shares held as pledge by NBFCs, probable overheating of the market, over-exposure by NBFCs to certain stocks and overleveraging of borrowers, it said in a notification.

Therefore, NBFCs with asset size of R100 crore and above have been directed to report online to the stock exchanges information on the shares pledged in their favour.

RBI said while NBFCs in general have in place their own internal controls with regard to lending against shares, including a loan-to-value (LTV) ratio, there are anecdotal evidences of volatility in the capital market being the result of offloading of shares by NBFCs.

It is, therefore, found 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 central bank said.

According to Sebi, Group 1 securities have a mean impact cost (cost of executing a transaction) of less than or equal to 1 and has traded on at least 80% of the days for the previous 18 months.