The shares of gold loan firms such as Manappuram Finance and Muthoot Finance surged on Thursday after the Reserve Bank of India proposed increasing the loan-to-value or LTV ratio to 75 per cent from 60 per cent currently. If accepted the proposal would essentially mean gold loan firms can lend out more to borrowers for the same physical gold deposited as lien.
A working group under the chairmanship of K U B Rao studied the issues related to gold and gold loans by non-banking finance companies (NBFCs) and the draft report has been put up for suggestions. The report was made public late on Wednesday.
Muthoot Finance scrip hit a new high and last traded at Rs 230, up 10.2 per cent on Bombay Stock Exchange (BSE) in a strong Mumbai market on Thursday. The firm is backed by Matrix Partners and Baring India Private Equity among others.
Manappuram Finance scrip hit upper circuit for the day and closed at Rs 40.5, up 19.9 per cent on BSE. It is backed by Baring India Private Equity, India Equity Partners and Sequoia Capital, among others.
The working group has suggested that the gold loan companies should consider only the price of the gold and not the jewellery making charges and other taxes in determining the value of the gold. At present, different NBFCs have different methods to arrive at the value of pledged gold.
The ratio is an important tool that can vary the quantity of gold loans that a company can provide to customers.
The committee’s report on the gold loans sector is positive specially for the two prominent gold loan focused NBFCs Muthoot and Manappuram. Due to the rapid expansion in the portfolios of these companies, the RBI had curbed the LTV to 60 per cent, which impacted their growth rate.
George Alexander Muthoot, managing director, Muthoot Finance, said, “The release of the report will remove the negative perception created in the market about gold loan business. Apart from suggesting some of the hygiene factors to be inculcated, the gold loan companies’ role in monetising and creating liquidity for the gold available in the country has been appreciated in the report.”
He pointed out that the report has concluded that gold loans have no impact on gold imports, which has come under the scanner of the authorities.
The rate of interest has been a cause of concern as some NBFCs have resorted to unethical practices in charging high interest rates. Therefore, there are sufficient grounds to rationalise the interest rate structure including the penalty for default in repayment, the Rao panel report said. But it did not suggest a ceiling on the maximum interest rate that can be charged by gold loan firms.
At the same time, the panel has said that unbridled growth of branches by large gold loan NBFCs needs to be moderated as many branches lacked basic amenities and posed a risk to the gold pledged there. It has also called for tighter rules to deter retail investors from subscribing to non-convertible debenture (NCD) issues of gold loan firms.
(Edited by Prem Udayabhanu)