A paper on gold loans by a Reserve Bank of India (RBI) working group favours banks over non-banking financial companies (NBFC).
Currently, NBFCs devise lending formulae after taking into account the overall value of gold jewellery, which includes making charges, manufacturing loss, tax, etc. According to the paper, current RBI guidelines allow NBFCs to tweak the calculating method according to their convenience, without the overall lending exceeding 60 per cent of the loan-to-value (LTV). Though the formula recommended by RBI raises the LTV, overall lending declines slightly below that using the current formula (with 60 per cent of LTV), as this doesn't allow NBFCs to include making charges, tax, etc in the overall value of gold.
In the revised recommendations, RBI mandates NBFCs to consider only the value of the metal. Hence, the overall lending comes down marginally.
"The recommendation by the committee for an LTV increase is incrementally neutral for the sector, though it provides much-needed clarity to gold loan NBFCs," said Pankaj Agarwal, an analyst with Ambit Capital.
"Moderation in the operations of gold loan NBFCs may provide increased opportunity to banks to further enhance their share in the gold loan market. For this, banks would have to reorient their business models and customer services to fully tap the business opportunities in the gold loan market, as they may still lack the speed to deliver to borrowers whose needs are catered to by gold loans NBFCs so far," the paper said.
Data compiled by RBI (from NBFCs and banks) showed of the total gold loans outstanding at the end of March 2012, 72 per cent were provided by banks, while the rest were given by gold loan NBFCs. However, the share of NBFCs doubled from 13 per cent at the end of April 2008. Thus, annually, the share of the NBFCs increased by about three percentage points.
In recent years, there has been a growing demand for gold loans. On an annual basis (considering a three-year moving average), gold loans in India grew 60-70 per cent in the last four years. The growth in gold loans from NBFCs has been particularly high, albeit marked by fluctuations.
In 2009-10, the annual growth in gold loans from NBFCs soared to about 140 per cent, before recording fluctuations and later, a decline.
Of late, annual average growth in gold loans from banks has been rising. Since August 2009, when it fell to 35.0 per cent, it rose steadily to 76.0 per cent by February 2012.
Among the challenges banks face is the lack of standard procedures, which a report by the Bank of America Merill Lynch termed vital. Also, RBI plans to put a cap on loan rates, another factor that may hit NBFCs. The current cap for microfinance companies stands at 24 per cent. Given the secured nature of gold loan products, Bank of America Merill Lynch believes the cap may be kept at the same level or below the cap for microfinance institutions. This may take a toll on net interest margins.