Besides the cap on lending, the RBI on Thursday also said NBFCs can accept only Group 1 securities as collateral. Group 1 securities are defined are defined by Sebi as those with an impact cost of 1 or less, which means the share price does not move more than 1 percent up or down when a block of those shares worth Rs 5 lakh are bought or sold.
The Reserve Bank of India (RBI) norms prohibiting NBFCs to lend more than 50 percent of the value of shares pledged is likely to impact the segment growth, says Deutsche Bank (DB). Currently, some NBFCs have been lending as high as 70 percent of the value of pledged shares.
Besides the cap on lending, the RBI on Thursday also said NBFCs can accept only Group 1 securities as collateral. Group 1 securities are defined are defined by Sebi as those with an impact cost of 1 or less, which means the share price does not move more than 1 percent up or down when a block of those shares worth Rs 5 lakh are bought or sold.
In addition, NBFCs with an asset size of Rs 100 crore and above will have to disclose to stock exchanges about the shares pledged with them.
DB says while these regulations could lower stock price volatility, it could also impact incremental LAS loan growth for NBFCs as quantum of securities eligible for LAS will go down, which makes for 5 to 15 percent of assets under management (AUM) for some of the leading companies in the space.
Why RBI is worried
* At present, loan against securities (LAS) carried out by NBFCs is not subject to specific instructions apart from the general prudential regulation applicable to all NBFCs.
* NBFCs give LAS either by way of pledge of shares in their favour, transfer of shares or by obtaining a power of attorney on the demat accounts.
* Irrespective of the manner and purpose for which money is lent under LAS, 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.
* Other concerns 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.
* While NBFCs in general have in place their own internal controls with regard to LAS like loan-to-value (LTV) ratio, there are anecdotal evidences of volatility in the capital market being the result of offloading of shares by NBFCs.
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