Draft norms on lending against gold seen easing investors' fears

Last Updated: Thu, Jan 03, 2013 20:00 hrs

The draft norms on lending against the yellow metal appear to have placated investors’ concerns, as shares of gold loan companies surged by 10-20 per cent in Thursday's trade.

A working group of the Reserve Bank of India (RBI), under the chairmanship of KUB Rao, admitted there is a need to increase monetisation of idle gold stocks in the economy for productive purposes. It suggested a higher loan-to-value ratio for gold loan companies (75 per cent versus 60 per cent) that will allow non-banking finance companies (NBFC) to lend more money against gold securities.

For the past one year shares of gold loan companies have significantly underperformed banking stocks due to regulatory overhang. The “much-awaited” draft rules, released yesterday, seem to ease fears of regulatory hurdles in gold loan business.

Shares of Muthoot Finance touched a 52-week high in intra-day trade and ended 9.5 per cent up, at Rs 229.80 on the National Stock Exchange (NSE). Manappuram Finance’s shares jumped close to 20 per cent to close at Rs 40.60 on NSE.

“With KUB Rao Committee report reaffirming the systemic importance of gold loan companies, the overhang will subside,” Kunal Shah, analyst with Edelweiss Securities, said in his note to clients on Thursday.

Analysts said while the proposed rules on interest rate cap, restriction on raising retail non-convertible debentures and cap on branch expansion might hurt gold loan companies’ businesses to a certain extent, the draft norms are less severe than anticipated. “We read this as exhaustive representation of all possible customer complaints, and it is unlikely that every recommendation will materialise in the prescribed format,” Shah noted.

According to rating agency ICRA, the curb on NCDs is likely to affect gold loan companies that have higher reliance on retail funding.

Another rating agency said the overall norms might hit the companies. “The report, if implemented, will have a negative impact on gold loan companies. Review of certain type of NCD issuances, cap on interest rates, tightening of valuations standards, lower leverage and curbs on branch expansion, among others, would hit these companies,” said Ehsan Syed, director, bank and financial institutions, India Ratings & Research.

Among gold loan companies, Muthoot Finance has one of the highest dependence on privately placed NCDs (around 37 per cent of its total funding is through this route). However, the Kerala-based gold loan company remained positive on the draft rules.

“The committee’s report on the gold loan sector is very positive. The release of the report will remove the negative perception created in the market about gold loan business... The recommendation of the committee for prescribing the appropriate loan to value ratio is found suitable, while its recommendation that there is no case for conceding level playing field for the gold loan NBFC with the bank is highly appreciated,” George Alexander Muthoot, managing director of Muthoot Finance, said.

Bankers admitted the draft norms would be positive for gold loan industry. “It is good for banks as it removes uncertainties on the business and it also looks encouraging for NBFCs,” said D Sampath, head of retail banking at Federal Bank, which has a gold loan portfolio of Rs 5,600 crore.

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