Gold loan business model worries RBI

Written by fe Bureau | Mumbai | Updated: Jun 29 2012, 15:13pm hrs
RBI on Thursday expressed concerns that the business model of gold loan companies is driven by borrowings, of which, bank finance forms the major component and is increasing at a fast rate.

Any adverse development in recovery by these NBFCs or an adverse movement in gold prices may have a spill-over impact on the asset quality of the banks, the central bank said in its financial stability report. RBI said the total asset size of gold loan companies stood at R445.1 billion, an increase of 712% in two years ended March, 2012. The share of Non-Banking Financial Companies (NBFC) in total gold loans extended by all financial institutions, showed a marked increase where individual are the largest borrowers. Retail gold loans account for 95% of the total gold loans of these companies, said the central bank.

There is a significant concentration among the companies, as the growth in advances is mainly contributed by two companies, said the central bank. It added the borrowings of these two companies increased by nearly 200% in 2010-11. Two leading gold loan disbursing companies, Muthoot and Manappuram grew their gold loan portfolio by 114% and 244% to R15,728 crore and R6,349 crore respectively in 2010-11.

However, managing director of Muthoot Finance George Alexander Muthoot said that loan growth will be only around 10-15% in 2012-13.

Given the rapid pace of loan growth by such gold loan companies where over 90% of loan assets being collateralised by only one product, RBI had ruled that these companies must maintain a Loan-to-Value (LTV) ratio, not exceeding 60% for loans against gold jewellery and disclose in their balance sheet the percentage of such loans to their total assets. RBI had also said NBFCs should not grant any advance against bullion or primary gold and gold coins. According to Edelweiss Securities, every 25% decline in gold prices can impact the earnings of gold loan companies by 1520%. Following the cap on LTV, banks such as Federal Bank, Indian Bank and Indian Overseas Bank expressed interest in expanding their gold loan portfolio and sale of gold coins.

M Tanksale, CMD, Central Bank of India said, We sell gold coins to the customers more for the retention of the customers rather than a separate growth vertical. He added that banks can do away these business if RBI thinks the growth in this section is rapid.