Traders Face Higher Costs on RBI Move

Proposal to raise risk weights for NBFCs will drive away retail players, say brokers

Dalal Street traders, who rely on funding from non-banking finance companies (NBFCs) to trade in stocks and invest in public offers, may need to be prepared for higher borrowing costs. 

The Reserve Bank of India (RBI) committee's proposal to increase risk weights for NBFCs with capital market exposure to 150% is expected to push up brokers' cost of funds, resulting in these firms charging more for money given to traders. 
Brokers expect the move will lead to a fall in market volumes and bemoan the fact that the rules are being changed 
at a time when trading opportunities have been on the wane due to an uncertain global environment. 
"The participation of retail traders has already shrunk in recent months. Higher costs will drive away even the rest as making money in these market conditions are difficult," said Rajesh Baheti, managing director of the Mumbai-based Crosseas Capital. 
The sharp decline in retail participation in recent months has been because of a dip in activity in mid- and small-cap shares. Retail traders usually borrow from brokers and trade in these stock segments, which usually rally sharply only in bull markets. 
But brokers argue the impact will not be much as NBFCs are lending less to retail stock traders nowadays; instead they are focusing more on promoters, willing to pledge their stock holdings for their business or personal needs. 
"Broadly, lending to capital market-related activity will shrink because of higher provisioning, but within this segment the focus will be on lending to promoters because of the collateral they provide," said a senior official with a Mumbaibased broking firm, which owns an NBFC. 
The loans to promoters against shares typically have tenure of one to three years and carry a margin requirement of two to three times. NBFCs charge premium rates for this short-term finance and have the right to sell pledged shares if promoters default. 
"The demand among retail traders for loans to trade is elastic, while that is not the case with promoters. This will allow broker NBFCs to pass on the higher funding cost to promoters," Baheti said. 
As on June 30, 768 companies have pledged shares with the total value at $ 33.4 billion compared to $37 billion on March 30, according to Morgan Stanley. The pledged value of these shares is about 2.2% of India's market capitalisation, the lowest level since March 2009.
nishanth.vasudevan @timesgroup.com