NBFCs cannot lend more than 50% of the value of shares pledged: RBI
Updated: Aug 21, 2014 03:23:42pm
Mumbai, Aug 21 (KNN) The Reserve Bank of India today issued norms for lending against shares by non-banking financial company (NBFC) and said that NBFCs cannot lend more than 50 per cent of the value of shares pledged.
At present, lending against shares carried out by NBFC is not subject to specific norms apart from the general prudential regulation applicable to all NBFCs.
According to the new RBI norms, NBFCs have to maintain a loan-to-value (LTV) ratio of 50 per cent and accept only Group 1 securities as collateral for loans of value more than Rs 5 lakh, it said in a notification.
In addition, NBFCs with asset size of R 100 crore and above shall report online to stock exchanges, information on the shares pledged in their favour, by borrowers for availing loans.
“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.
“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,” said the apex bank.
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 adding that while NBFCs in general are understood to 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, RBI said. (KNN/SD)
At present, lending against shares carried out by NBFC is not subject to specific norms apart from the general prudential regulation applicable to all NBFCs.
According to the new RBI norms, NBFCs have to maintain a loan-to-value (LTV) ratio of 50 per cent and accept only Group 1 securities as collateral for loans of value more than Rs 5 lakh, it said in a notification.
In addition, NBFCs with asset size of R 100 crore and above shall report online to stock exchanges, information on the shares pledged in their favour, by borrowers for availing loans.
“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.
“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,” said the apex bank.
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 adding that while NBFCs in general are understood to 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, RBI said. (KNN/SD)
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