Riding high on bull wave, HNIs take leveraging to a new record advances

By: Gayathri Nayak

MUMBAI: Borrowing by pledging shares is steadily rising for the first time since the financial crisis of 2008, with the stock market’s bull run encouraging wealthy individuals to leverage their stock holdings.

Advances to individuals against shares and bonds rose 24.9% year-on-year in August to Rs 3,600 crore, compared with an overall loan growth of just 10.2%, according to Reserve Bank of India data. Borrowing by pledging shares had increased only 8.8% yo-y in the year-ago period. Advances against shares have sporadically picked up during a few quarter end months. But there is a sustained rise in these loans for the first time since the global financial crisis of 2008.

This suggests that people are increasingly borrowing by pledging shares to benefit from the rising Sensex. Some analysts said that wealthy investors who were avoiding the market after the global financial crisis that followed the collapse of Lehman Brothers, are now back in the market. “High net-worth individuals are coming back to equities through the margin-funding route,” said Sandeep Nayak, executive director and CEO of Centrum Broking.

“There is optimism that the markets will do well over the next few years as the GDP growth trajectory is expected to be back to over 7.5% from the over 5.5% levels now,” said Nayak. The BSE Sensex has rallied 27.5% this year. Moreover, these stocks are also perceived to be reasonably priced, as the P/E is about 16.5 times based on FY15 estimated earnings.

Brokerages expect the Sensex to hit 28,000-30,000 by March 2015. An investor has the option of investing in the market by pledging his shares with banks and NBFCs. However, there is a cap of Rs 20 lakh per borrower in case of borrowing from a bank. “Growth in such loans at the industry level indicates that the number of borrowers taking a loan from the banking system by pledging shares is on the rise,” said Nayak.

In case of an NBFC, he can borrow up to 50% of the value of the shares. The Reserve Bank has also prescribed norms for companies that qualify to be pledged. Brokerages estimate that shares of about 640 firms are eligible to be pledged.

Whenever there is fluctuation in value post pledging, the borrower has to make good by paying a margin. The regulators have tried to ensure that the rise in such borrowings do not pose a systemic risk by ensuring stringent guidelines, a banker said.