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The NBFC sector has witnessed massive growth in the last few years. The size of the balance sheets of NBFCs is now greater than a quarter of that of banks. In absolute terms their balance sheets have doubled. This growth can be attributed to lighter regulations which have given them flexibility to fulfill a host of financing requirements. However, this transpired into a systematic risk. The risk manifested when one of the most significant infrastructure investment focused NBFC players unraveled in 2018. Therefore it was necessary to re-examine the regulatory approach. The NBFCs regulatory framework needed to be re-oriented to keep pace with the changing realities in the financial sector. The RBI, on October 22, 2021 issued the revised regulatory framework for NBFCs. In this article, we shall discuss the impact of new lending cap on NBFCs for small players.
Come next year, no single investor who is willing to subscribe to IPOs will be able to borrow more than 1 crore rupees from NBFCs as the Reserve Bank has tightened the rules for shadow banks. It will be required to follow stern capital and bad loan provisioning norms.
The Reserve Bank has announced a limit on non-bank lenders financing subscriptions to initial share sales. This has been done owing to stem the flow of huge amounts of borrowed capital by individuals with high net worth to such offerings.
The move of the RBI to put a limit in IPO financing follows surplus liquidity in the system being used to fund huge subscriptions from individuals with high net worth in recent public offerings. As per RBI, riding on the surplus liquidity condition, issuance of commercial paper increased significantly to 10.1 trillion rupees during H1: 2021-22 from 7.9 trillion rupees during the period of 2020-21. The NBFCs share in total CP issuances enhanced to 43.2% in the fiscal first half from 21.9% a year earlier.
The new lending cap on NBFCs against funding initial shares sales can provide good opportunity for small players. Various smaller NBFCs may enter the estimated 80k crore rupees short term funding market. The IPO financing market may reduce once the 1 crore rupees limit per borrower rule takes effect from April 1, 2022.
Dealers stated that long-term wealthy investors bidding for below 50 lakh rupees in an IPO may not have higher allocations in the absence of astronomical bids.
Experts believe that the revised regulation seems more inclusive, wherein small players will get good opportunities to lend investors who are seeking to subscribe to shares. Further, they said genuine high net-worth individuals will get good opportunity to apply for IPOs, thereby creating long term wealth which is not available right now due to concentrated IPO funding.
As per the RBI guideline, NBFCs cannot lend more than 1 crore rupees to those investors who are looking to buy stocks in initial share sales from April 1, 2022. Till now, wealthy investors have been borrowing money from bigger NBFCs that levy high rates as per the demand for money. In turn NBFCs borrow through commercial papers or shorter duration debt securities.
Raman Agarwal, Area Chair of NBFCs- Council for Economic Understanding, stated that IPO funding is a risk leveraging business considering you can earn huge margins also. Small NBFCs with focus and expertise on capital market may get in once the regulations of capping large funding come into effect from next year. Here the aim is to mitigate potential risks.
Karthik Srinivasan, group head of financial ratings (ICRA), said that larger NBFCs are already active in IPO funding, but small NBFCs are expected to enter this space, but it depends on the fact how they will manage challenges related to fund mobilization. Operational risk may also increase if NBFCs enhance the number of borrowers to whom they extend IPO funding. Raising resources can be a major challenge for small entities as cost of funding would be higher.
Separately the RBI has also notified about its new scale-based regulation for NBFCs with a view to avoid any potential collapse, (Infrastructure Leasing and Financial Services). The final guidelines follow a discussion paper which was issued by the regulator earlier this year.
Read our article:Factoring Regulation (Amendment) Bill 2021: Drawing 9000 NBFCs