NBFCs with assets in excess of Rs.100 crore will have to maintain
loan-to-value ratio of 50%, says central bank RBI
The Reserve Bank of India (RBI) on clamped restrictions on the amount
that non-banking financial companies (NBFCs) can lend against shares pledged as
collateral, in an attempt to curb potential volatility in the stock markets
after a surge in equity prices and to forestall lending risks amid a pile-up of
bad loans.
Effective immediately, NBFCs with assets in excess of Rs.100 crore will
be required to maintain a loan-to-value ratio of 50%, the central bank said.
That means the financiers will be allowed to lend an amount equivalent to only
50% of the value of shares pledged as security. No cap had hitherto been placed
on the loan-to-value ratio.
Also, these lenders will be allowed to accept only so-called Group 1
shares as collateral while giving loans amounting to Rs.5 lakh and above. Group
1 shares are those that were bought and sold on at least 80% of the trading
days in the previous 18 months on the stock exchanges, and the average cost
incurred due to a price decline is less than 1%.
In other words, they are likely to be more liquid and less volatile than
other shares trading in the market. The central bank RBI said the changes were
necessary to prevent an increase in volatility in the capital markets because
of NBFCs selling shares held by them in case of loan defaults. But it has not
asked NBFCs to wind down their positions for past loans that do not meet the
new norms.
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