Besides mutual funds (MFs), NBFCs are large lenders against shares — often funding promoters to diversify and raise stake through creeping acquisition.
There are more than 11,000 NBFCs of which 218 are systemically important, having total assets of Rs 25 lakh crore.
The recent communique from the regulator assumes significance with the promoter of a large corporate house cutting a deal with MF managers to buy time, and another corporate house moving court against lenders which sold pledged shares to cut losses.
“MFs are not within RBI’s jurisdiction, but the standstill deal between funds and the promoter concerned has not gone down well with the regulator. If borrowers pledging shares to raise money fail to bring in additional collateral when stocks fall, lenders should sell the stock to protect their exposure. And, if the shares can’t be sold, credit rating agencies should downgrade the instruments issued by the borrower to raise funds. If none of these happens, the very product ‘loan against shares’ comes under question,” a person familiar with the subject told ET.
RBI is understood to be closely monitoring developments relating to share pledged by promoters. The Securities and Exchange Board of India (Sebi) is silent on the understanding between MFs and the promoter who has been given a breathing space of six months by the funds.
“The instruments have not been downgraded even though the failure to furnish stocks for meeting margin requirements amounts to a breach of covenant. Under the circumstances, if more corporates enter into such moratorium or standstill loans, or courts rule in favour of a borrowing corporate challenging lender’s decision to sell pledged stock in a falling market, RBI may revisit the rules on loans against shares for NBFCs and banks. This could include raising the risk weightage on loans against stock,” said a source.
A higher risk weightage on a loan requires an NBFC or bank to earmark more capital for such an asset. “This would make the product less attractive,” said an official with an NBFC.
EXPOSURE DETAILS TO A TROUBLED HFC SOUGHT
Value of shares pledged by promoters is around Rs 2.2 lakh crore, according to stock exchange data.
In its communique, RBI has also asked NBFCs to share exposure details to a troubled housing finance company which has been in news since past few months.
The RBI board which met last week has decided to compile all relevant information on NBFCs, many of which have been asking the regulator for liquidity support. While there is a widely shared perception that crisis faced by the sector few months ago has waned a little, there are fears that some finance companies could still find it difficult to roll over borrowings. With funds selectively pruning exposure to NBFCs, some of the companies have sold assets to stay liquid and shrink their books.
Even as NBFCs struggled for liquidity and tide over their asset-liability mismatch, a volatile equity market brought to the fore the issues relating to promoter funding against pledged shares. The structured deals between MFs and promoter entities (or holding companies) to raise funds against stocks of large, flagship companies came as a revelation to many.