Higher LTV cap unlikely to impact gold loan business

Jan 10 2014, 03:55 IST
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SummaryThe Reserve Bank of India’s decision to increase the loan-to-value (LTV) ratio for gold loan companies to 75% is likely to have no near-term impact

The Reserve Bank of India’s decision to increase the loan-to-value (LTV) ratio for gold loan companies to 75% is likely to have no near-term impact, industry experts say.

Companies like Muthoot Finance and Manappuram Finance, which represent close to 90% of the organised gold loan industry, believe that the growth phase in the gold loan industry will start somewhere in the next financial year.

On Thursday, shares of Muthoot and Manappuram ended up nearly 20% each on the Bombay Stock Exchange, following the news.

“In March, our total assets under management (AUM) was nearly R26,000 crore. In the last three quarters, this has fallen by at least 15% if not more. We will spend the next few quarters to come back to the March levels," said Oommen K Mammen, chief financial officer, Muthoot Finance.

The company also does not plan on adding more branches to its 4,200 branch network and expects the next year to be that of measured growth, Mammen said.

I Unnikrishnan, executive director and deputy chief executive officer, Manappuram Finance too expects growth to come in some time in the April-June period.

Experts say that though the central bank mandated a lower LTV, lenders had often breached this cap, lending more. The current move will rationalise this and make sure that gold loan companies will have a more practical cap to work with.

“The credit growth in the entire system is between 15-20%, so the gold loan industry will be there in the medium term. However we do not see much growth in the next six to nine months,” said Vibha Batra, senior vice president, co-head financial sector ratings, Icra.

Gold loan companies however believe that more than anything else, RBI’s move will remove the negativity around the gold loan business. “This is a sign that RBI has an increased level of confidence in the gold loan business now,” Mammen from Muthoot Finance said.

In a notification on its website on Wednesday, RBI stated that it has raised the LTV ratio for gold loan companies to 75% with immediate effect. The central bank had set a 60% LTV ratio cap in March 2012, after being concerned about the rapid growth in the gold loan sector in a short span of time. Following this, an RBI committee chaired by KUB Rao had recommended that gold loan companies could be provided with a higher cap on LTV ratio.

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