BW Communities

...And The RBI On Lenders

Nevin John Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Last week, the central bank restricted the loan size of gold NBFCs to 60 per cent of the loan-to value (LTV) of gold jewellery. It also barred financiers from granting advances against bullion/primary gold and gold coins. It stipulated that NBFCs should maintain a minimum Tier-l capital of 12 per cent by 1 April 2014, while asking them to disclose the percentage of such loans to their total assets. According to George Alexander Muthoot, managing director of Muthoot Finance, the largest player, RBI took this step because during the past year and particularly over the past two quarters there was a dramatic rise in the number of new entrants in this field. Pledging gold against loans is common in the south, especially in Kerala. But over the past three-four years, this phenomenon has expanded across the length and breadth of the country. The opportunity for NBFCs came up with the capital depletion during the financial meltdown in 2008. Gold loan financiers borrowed at high rates from banks and raised capital from individuals issuing debentures, offering high interest, for lending against gold. They offered 66 to 100 per cent of the value of gold. The RBI move to cut the LTV to 60 per cent will kill the competition among NBFCs, says a senior analyst, who tracks the industry. Now, the customer just needs to focus on the interest rate as the loan amount for a particular asset will be the same for all players. "After the RBI notification for NBFCs, the LTV offered by banks is comparatively higher. As the 60 per cent LTV norm is meant to help NBFCs, banks will also stand to benefit if they maintain similar LTVs," says Thomas John Muthoot, chairman and managing director, Muthoot Fincorp. Now, gold financiers will have to find more customers to build volume in business. But that may not be easy since it is feared that customers will now go to the unregistered players or non-NBFCs in the segment, which are in thousands. "They will continue offering loans up to 100 per cent of the value of the gold and that will pose a challenge to the business of the major players," say industry sources. RBI's thinking is correct. The risk factor for NBFCs has come down following this move, considering the fluctuation in gold prices. But the stock market did not buy this view. The share price of Muthoot Finance and Manappuram Finance, the largest and the second largest players, fell 11.35 per cent and 6.1 per cent, respectively, on 22 March, a day after the RBI announcement. The three major gold financing companies, including third largest Muthoot Fincorp, welcomed the RBI move, saying it will strengthen the industry. At the same time, they admitted that their margins would be squeezed. There are about 20 active NBFCs in the gold loan business; gold loans make up over 50 per cent of their financial assets. They need to maintain a minimum Tier l capital of 12 per cent by 1 April 2014. As some of them have extensively leveraged the balance sheet for expanding their business, they need to cut down branches and shrink the business to become profitable and repay the loans. (This story was published in Businessworld Issue Dated 09-04-2012)