The Reserve Bank of India (RBI) has tightened the norms for giving loans against shares by non-banking finance companies (NBFCs).

NBFCs lending against collateral of shares have been told to maintain an LTV (loan-to-valve). They can accept only specified Group 1 securities as collateral for loans of value more than Rs. 5 lakh. All NBFCs with asset size of Rs.100 crore and above have also been asked to report on-line to stock exchanges information on the shares pledged in their favour by borrowers for availing loans.

At present, lending against shares by NBFCs is not subject to specific instructions apart from the general prudential regulation applicable to 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. Irrespective of the manner and purpose for which money is lent against shares, 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, said the RBI.

“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,” it pointed out. Though NBFCs, in general, had in place their own internal controls with regard to lending against shares, including a LTV ratio, the RBI said there were anecdotal evidences of volatility in the capital market being the result of offloading of shares by NBFCs. “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. (The Hindu)