RBI cracks down on debt sales by non-bank finance firms

The Reserve Bank of India has imposed restrictions on debt sales by non-bank financial companies (NBFCs), cracking down on issuance by an industry that has less regulatory oversight than banks and relies heavily on capital markets to fund its business.

Under the rules unveiled late on Thursday, the RBI set a minimum waiting period of six months between private debt placements by NBFCs.

NBFCs such as Shriram Transport Finance frequently raise funds by selling bonds to both institutional and retail investors at high yields, as they are not allowed to raise money through savings deposits. Its shares fell 1.6 per cent on Friday, lagging the 2.8 per cent gain in the main NSE index .

The RBI also mandated that debt issues must be fully secured by underlying assets, and said only up to 49 investors can buy into a private placement, aligning the sector to rules that apply to corporate issuers.

The restrictions come after NBFC debt sales reached 725 billion rupees in the financial year ended in March, or one-fifth of total private placement of 3.5 trillion rupees, according to data provider Prime Database.

NBFCs tend to engage in activities such as consumer finance, housing loans and commercial vehicle finance. However, they often fund such long term assets with short-term funds such as one-year debt.

"The main risks from NBFCs are the rolling over of their funding and the asset liability mismatch," said Anindya Dasgupta, treasurer at Barclays.

While NBFC issuers must wait for six months before announcing a new debt offer, NBFCs may raise debt in multiple tranches within the six-month period as long as the issuances are part of a single fundraising registration, an official with direct knowledge of the matter said, declining to be identified.

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