Gold loan NBFCs heave sigh of relief

Written by fe Bureau | Mumbai | Updated: Jan 4 2013, 07:12am hrs
With the Reserve Bank of India (RBI) having put out the draft report by its working group on gold, non-banking finance companies (NBFCs) dealing with gold loans are heaving a sigh of relief.

Over the last few months, gold loan NBFCs were under a lot of scrutiny as analysts expected RBI to announce tough restrictions with its report. However, gold loan players are terming the report balanced and fair.

The committees report on the gold loans sector is very positive. Release of the report will remove the negative perception created in the market about gold loan business, said George Alexander Muthoot, managing director, Muthoot Finance.

While the working group report suggests close monitoring of the business of these gold loan NBFCs, it also suggests the loan-to-value (LTV) ratio on gold loans should be raised to 75% from the current limit of 60%.

In March last year, RBI had put a cap on LTV ratio of these companies at 60% and raised their capital adequacy ratio requirement to 12%, by April 2014, up from an earlier requirement of 10%.

In its monetary policy review announced in April last year, RBI had formed this committee under KUB Rao to look into issue related to gold and gold loan companies and submit its report.

Muthoot Finance and Manappuram Finance, the two largest gold loan companies in the market, have underperformed Bankex by 30% and 80% respectively, due to regulatory overhang, analysts from Edelweiss Securities noted in their report.

The report also raises concerns over the interconnectedness of gold loan companies and the formal financial system and said there is a requirement to curb it. Moreover, the report also suggested a rationalisation of interest rates being charged to customers and that a cap on interest rates can be looked at.

"We need to discuss it with it them. I don't think there should be cap by RBI on interest rates unless the industry does not discipline itself," says I Unnikrishnan, managing director, Manappuram Finance.

Muthoot Finance and Manappuram Finance charge around 22% interest to their customers, which is the lowest in the industry, the companies claimed.

Gold loan providers surge

Mumbai: Scrips of gold loan providers soared on Thursday after the RBI report on Wednesday. The ratio is an important tool that can vary the quantity of gold loans which a company can provide to customers.

Muthoot Finance shares were up 17.87% while Manappuram Finance rose 19.97%. Shares in Titan Industries, which makes gold jewellery, were down 1.75% on concerns over rising costs after the government says it would make importing gold costlier.