New NBFC lending norms to cut risks in mid, small cos: IIFL
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New NBFC lending norms to cut risks in mid, small cos: IIFL

23 May, 2017, 04:00 IST | Mumbai, India
Under the new rules, NBFCs with assets of Rs 100 crore plus will be required to maintain a loan to value (LTV) of 50 percent, which means financers will be allowed to lend an amount equivalent to only 50 percent of the pledged shares.

Discussing the impact of the move, Nirmal Jain, Chairman, IIFL , said the new norms are unlikely to have a major impact on the business. IIFL NBFC has around 7-8 percent (of the portfolio) exposure to loan against shares. �But most of it is against group 1 and also we keep out LTV at around 50 percent. Thus, the new guidelines are likely to have little impact on us. Also, they are effective prospectively and not retrospectively.�

Jain feels it is good policy move and will help the markets. Though he feels that it may keep the leverage of mid and small cap companies in check, but thinks the larger objective is to contain risks in these companies.

He thinks the new regulations could have emerged due to the recent case of Bhushan Steel . Jain however feels that Group 1 securities should be defined in a better way.

Below is the transcript of Nirmal Jain's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: We were speaking with a couple of other NBFCs like Motilal Oswal, Religare Finvest, etc and they told us that they don�t have too much of an exposure to lending against shares pledged as collateral, what is the exposure that IIFL has and will it be a big impact this newsflow that has come out?

A: IIFL NBFC has about 7-8 percent of its portfolio loan against shares but most of it is against group 1 and also we keep our LTV at around 50 percent. So these guidelines will not have much impact on our business.

Also they are effective progressively that is for prospectively and not retrospectively, so I don�t think it will have much impact. In a way this is a very good policy move because what happens is that when bull run gathers momentum, most of C group and D group shares get financed and that is where most of the small investors lose money because most of these scrips, once there are operators who get financed and they rig up the stock prices and whenever the bull market corrects or reverses then most of these smallcap and midcap stocks tend to go to highs much higher than their intrinsic value in the frenzied bull run. As of now we are still not in a frenzy or we are not in the last phase of bull run, at least don�t look like that way but that is where the risk arises. So it is a pro-active measure and I would say that this will help the market. In fact this first time we have seen coordinated move by the two regulators where I think SEBI and RBI must have coordinated to try to remove the arbitrage if people have margin funding and financing through NBFC. So I think it is a pro-active move, it will not impact much at this point in time. It will obviously impact the smallcap and midcap stocks if there was leveraging but going forward, at this point in time, I would also feel that even the other players would not have lent much to these kind of scrips.

This might have come in the wake of also Bhushan Steel where some NBFCs have exposure. So whenever such a thing happens, there is a cascading impact because the banks get hit by -- there are large loans almost 35,000-36,000 crore, promoters are leveraged against those shares and one more thing that will happen, the reporting will basically make these promoters if they want to leverage or the operators who want to leverage fear one thing because once the market knows that there is a leverage against a particular stock then there is a tendency of the other set of speculators to short or bring down the stock price. So in a way, this will keep leveraging on smallcap and midcap in check,which I would say is healthy. Only thing I would like to add here is the definition of group 1should be dynamic that is one.

Secondly, rather than -- I don�t know when the group 1 was defined, there is multiple classifications. So it should be logical based on liquidity, based on the performance of the stock then it becomes easier for the NBFCs and market people to take exposure.

Latha: Is there a difference between people giving you group 1 or non-group 1 shares for margin funding and a separate set of promoters who are pledging their shares because they want to repay debts, that would be happening all the time, is there any bar against the latter where they are not taking the money for margin funding but for other purposes, that pledging goes on unhindered, doesn�t it?

A: If you cannot lend against non-group 1 shares, you cannot lend against non-group 1 shares. I think that is what my understanding is.

Latha: It turns off a tap for smaller guys, right?

A: Yes, it may come very harsh on them maybe more prudent would have been to increase the risk weightage to 125-150 percent for those shares and any case disclosure norms will take care of speculative activities. So I think this will be harsh on some of the companies that are not in group 1 and the promoters might have needed money for general purposes. In any case, they cannot borrow from banks against shares because banks lending against scrips to individual is restricted to Rs 20 lakh. So this will be harsh on them but the larger objective basically is to contain price rigging in smaller and midcap also the undue risk when the stock prices can be very volatile. But at the same time, I think there is no logic for non-group 1 shares to be in F&O because that is also leveraging. So you cannot on one hand say that there is no leveraging available to these stocks from banking as well as NBFC that is entire financial sector and then there can be leveraging in those stocks through F&O that will be illogical.

Sonia: You told us that the LTV has 50 percent but can you just tell us how much is the absolute amount, the size of the loan and is there any curb on the quantum of loans that can be lent now?

A: Typically NBFCs can lend up to 15 percent of their net worth to one entity and 25 percent of their net worth to group entity. So there are already single party exposure limits. So the quantum of money obviously depend on the net worth of particular NBFC. What had happened, earlier there was a disclosure of the margin funding but these disclosures will help the market to assess that in these kind of stock there is a leveraging happening or these smallcap and midcap stocks, the leveraging is high, I think that will itself keep the speculative forces under check.