The Reserve Bank of India (RBI) has announced significant changes to the loan limits for shares and debt mutual funds. The central bank aims to empower investors by proposing to raise the loan-to-value (LTV) ceiling for these financial instruments.
New Loan Limits Granted by RBI
On Friday, the RBI formally proposed increasing the LTV for loans against shares from 50% to 60%. Additionally, the limit for debt mutual funds is set to rise from 50% to 75%. These changes are designed to enhance liquidity for borrowers seeking loans against their investments.
Expanded Loan Amounts
The RBI’s circular also indicates a five-fold increase in the maximum loan amount that an individual can secure from banks, now capped at Rs 1 crore. This new limit enhances borrowing capabilities for investors.
Guidelines for Debt Securities
Loan amounts for acquiring securities in secondary markets will be capped at Rs 25 lakh per individual. The RBI has outlined specific guidelines regarding loans against government securities and sovereign gold bonds (SGBs), which will adhere to existing bank policies and gold loan regulations.
Credit Rating and Securities Management
Should a debt security’s rating drop below BBB(-), banks are required to replace it with another eligible security within 30 working days. Alternatively, borrowers may need to repay a portion of the loan based on the downgrade.
Restrictions on Lending
Specific restrictions apply to prevent conflicts of interest. Notably, banks are prohibited from lending to their employees or employee trusts for purchasing the bank’s own shares. Additionally, loans against locked-in securities will not be permitted.
- Loan-to-value for shares: 60% (up from 50%)
- Loan-to-value for debt mutual funds: 75% (up from 50%)
- Maximum loan amount: Rs 1 crore
- Loan amount for secondary market securities: Rs 25 lakh
- Replacement period for downgraded securities: 30 working days
The MMA hopes that these proposed adjustments will stimulate more robust borrowing against investments, fostering a more dynamic financial market.
