RBI tightens norms for lending against shares

NBFCs have to maintain a loan-to-value ratio of 50%

Reserve Bank of India today prescribed rules including loan-to-value ratio for non-banking finance companies (NBFCs) to lend against shares. 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% in loans given against shares.

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 5 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 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 over leveraging 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.