NBFC Loan Against Shares RBI Guidelines

Narendra Kumar

31 Dec, 2020

The Reserve Bank of India has prescribed norms for NBFC Loan against shares. This was done with a view to tackling volatility in the capital market due to offloading of shares by NBFC.

Non-Banking Financial Companies (NBFCs) whose asset size is Rs 100 crore and above have been forbidden to give more than 50 % of the value of shares pledged by the borrowers with NBFCs. Its applicability would be on loans of Rs 5 lakh and above.

This step has been taken to minimize volatility in the market.

There is a requirement of maintaining a loan to value (LTV) ratio of 50% for a loan against shares by NBFCs. This has been done to bring in place some alignment. However, there might be a short-term impact but not too negative impact. In case of any movement in the share prices due to which shortfall arise in the maintenance of the 50% LTV, it shall be made good within 7 working days.

Previously there were many attempts have been made to address the margin-financing loophole that NBFCs with capital market exposure sought to exploit.As per the Rules framed by Securities and Exchange Board of India, it has allowed brokers to provide only 50 percent margins to customers.

As NBFCs are regulated by RBI, not by the SEBI, it has allowed brokerage groups to use the regulatory area.

When share prices fall down below a certain level, in such a case NBFCs sell the shares against which they lend. Usually, with this, it results in sharp falls in a company’s stock.

Securities & Exchange Board of India has made it mandatory for trusts and such entities which were extending loan against shares should reveal their source of funds or names of beneficiaries.

RBI said in a statement that however NBFCs had internal controls for lending against shares, including an LTV ratio, there were cases of volatility in the capital market due to offloading of shares by NBFC Registration.

NBFCs can accept only group-I securities as collateral for loans valued at more than Rs 5 lakh.

For NBFCs having the asset size of more than Rs 100 crore will have to inform stock exchanges regarding the shares pledged borrowers in their favor for availing the loans.

As per the reports, there have been many cases of NBFCs being overexposed to certain stocks as well as borrowers being overleveraged.

Now loan against shares by NBFCs isn’t subject to specific norms apart from the general regulation specified for all NBFCs.

A margin call occurs in case of the fall in the value of the securities. After this, brokers may sell the shares of the borrower the purpose of recovering money and to keep the loan to value ratio at 50 percent, brokers can ask clients to bring in additional securities.

Read our article:NBFC Registration Procedure with Reserve Bank of India