Interest rates on loans against shares surge up to 300 bps as lenders turn risk averse: Report

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Crisis in the financial sector and multiple defaults have spurred a 300 basis points (100 bps=1 percentage point) spike in interest rates on loans against shares (LAS), reports The Economic Times.

While the Reserve Bank of India (RBI) cut the repo rate by a cumulative 110 bps over the past four policies, interest rates on LAS shot up to 10-15 percent from 8-12 percent three months back.

A weak mutual funds (MFs) space and struggling non-banking financial companies (NBFCs) have triggered the surge as stakeholders turn risk averse, the report added.

LAS, or pledged shares, are resorted to when companies need to raise capital on quick timelines for investment or when they cannot arrange other lines of credit. As banks loans via pledged shares are capped at Rs 20 lakh per entity, the companies turn to NBFCs for the remaining capital.

Also read: Promoters raise, cut their pledge holding in these 30 stocks; what should you do?

"Interest on LAS has significantly surged in the past three months as MFs who lend to firms against collateralised shares have turned risk-averse with plunging stock prices. Lenders are now demanding even more cover along with higher rates," Vikrant Narang, CEO, Structured Finance, Ambit Finvest told the paper.

With the market in a free-fall, NBFC crashes, liquidity crisis and loan defaults by Deewan Housing Finance (DHFL), Essel Group, among others have piled on the troubles, resulting in a spike in incidences of pledged shares.

As on August 13, promoters of 830 listed companies had pledged shares worth Rs 1.86 lakh crore, the report noted, adding that around 80 of these have over 90 percent of their shares pledged.

Yes Bank, for example, is sitting on an 18.5 percent stake in Cox & Kings via pledged shares and has also acquired a stake in Eveready, Reliance Power, CG Power and others in a similar manner.

Market regulator SEBI had in June stated that companies would have to explain pledged shares exceeding 20 percent of the share capital, or 50 percent of promoter holding. It also raised red flags against invoking of pledged shares in the Essel case, post which MFs provided time for the asset sale to raise the repayment amount.