NBFCs in demand

Shares of six NBFCs rose by 0.06% to 1.62% at 11:15 IST on BSE after the central bank tightened norms related to lending against shares.

Reliance Capital (up 1.62%), Muthoot Capital Services (up 0.97%), Bajaj Finance (up 0.53%), Religare Enterprises (up 0.34%), Mahindra & Mahindra Financial (up 0.13%) and Bajaj Finserv (up 0.06%), edged higher.

The S&P BSE Sensex was up 122.78 points, or 0.47% at 26,482.89.

The Reserve Bank of India (RBI) has tightened norms related to lending against shares. In a notification issued on Thursday, 21 August 2014, the RBI said that non-banking finance companies (NBFCs) with asset size of Rs 100 crore and above shall maintain loan to value (LTV) ratio of 50% with regard to lending against shares. RBI further said that lending against shares by NBFCs will be restricted to Group 1 securities as collateral for loans of value more than Rs 5 lakh. The RBI also said that all NBFCs with asset size of Rs 100 crore and above shall report on-line to stock exchanges, information on the shares pledged in their favour by borrowers for availing loans.

Irrespective of the manner and purpose for which money is lent against shares, default by borrowers can and has in the past led to offloading of shares in the market by the NBFCs thereby creating avoidable volatility in the market, the RBI said. 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. Further, 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, the RBI said. 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 RBI said.

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