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Non-Banking Financial Companies (NBFC) with asset size of Rs 100 crore and above have been forbidden to give more than 50 per cent of the value of shares pledged with them (capping the loan to value ratio at 50 per cent). This would be applicable only to loans of Rs 5 lakh and above.
This has been done to minimise volatility in the market.
RBI said in a circular on Thursday that “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.”
NBFCs usually lend 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. Every broker in India provides loans against shares either through its own NBFC arm or by tying up with another NBFC.
RBI said that NBFCs would accept only Group I securities. Stocks which have traded at least 80 per cent of the days for the previous six months and have a maximum impact cost of one per cent constitute Group I securities.
The impact cost is the percentage price movement caused by an order size of Rs.1 lakh from the average of the best bid and offer price in the order book snapshot. The impact cost is calculated for both, the buy and the sell side in each order book snapshot.
A margin call occurs when the value of the securities fall. Brokers may then sell the shares to recover money or ask clients to bring in additional securities to keep the loan to value ratio at 50 per cent.
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