Reserve Bank of India tightens rules for lending against shares by NBFCs

Reserve Bank of India on August 21, 2014, has introduced stricter set of guidelines on lending against shares by non-banking financial companies (NBFCs). The move is aimed at tackling volatility in the capital market due to offloading of shares by NBFCs.

At present, lending against shares carried out by NBFCs is not subject to specific instructions apart from the general prudential regulation applicable to all NBFCs. 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.

NBFCs lending against collateral of shares shall, from August 21, 2014 will now require:

1. Maintain an LTV ratio of 50%; and

2. accept only Group 1 securities as collateral for loans of value more than Rs 5 lakh, subject to review by the Bank.

3. 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. The infrastructure for on-line reporting to the stock exchanges has been put in place. The exchanges may be approached for creation of user IDs.