RBI cap on NBFC loans expected to limit massive IPO oversubscription


RBI Cap on NBFC Loans Should Limit Massive IPO Oversubscription from FY23 | Photo credit: iStock images

New Delhi: The Reserve Bank of India (RBI) on Friday announced a revised regulatory framework for non-baker finance companies (NBFCs) that addresses initial sale of shares, capital requirements and bad debt recognition to reduce risk for the financial system at large.

Among other measures, as of April 1, 2022, NBFCs will not be allowed to lend more than 1 crore rupees to high net worth individuals (HNIs) to purchase shares as part of initial public offerings (IPOs).

“There will be a ceiling of Rs 1 crore per borrower for the financing of the subscription to the initial public offering (IPO). NBFCs can set more conservative limits, ”RBI said in a notification Friday.

The move is intended to curb leveraged auctions that involve buying IPO stocks with funds borrowed from NBFCs and then throwing them away after making listing gains and repaying the funding.

According to the ET report, the new rules will not apply to the upcoming IPOs of Paytm and Nykka.

The move is expected to reduce the astronomical oversubscription of IPOs, experts said.

The broader regulatory framework announced by RBI encompasses different facets of NBFC regulation covering capital requirements, governance standards, prudential regulation, etc. These regulations also include the categorization of NBFCs into four layers Top, Upper, Middle based on their size, activity and perceived risk.

Under the new standards, the net equity requirement for all NBFCs has also been raised to Rs 10 crore as Rs 2 crore – currently Rs 5 crore. This will apply to NBFCs marked as investment and credit companies, microfinance institutions and. Factoring companies.

Last mile lenders will also be required to recognize loans over 90 days past due as non-performing assets (NPAs) by March 2026 and over 150 days by March 2024.

“The contribution of NBFCs to supporting real economic activity and their role as an additional channel for credit intermediation alongside banks is well recognized. Over the years, the sector has undergone considerable evolution in terms of size, complexity and interconnection within the financial sector. Many entities have grown and become systemically important and therefore there is a need to align the regulatory framework of NBFCs taking into account the evolution of their risk profile, ”said the RBI.

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