Mumbai/Chennai: Shares of Muthoot Finance Ltd and Manappuram Finance Ltd soared Thursday after a Reserve Bank of India panel proposed to raise the loan-to-value ratio of finance companies lending money against gold.
The committee, headed by K.U.B Rao, has proposed to increase the ratio to 75% from 60%.
The 60% ratio means, for gold worth Rs.100 offered as collateral, lenders can give loans up to Rs.60.
If the recommendations are accepted, gold loan firms will be able to lend more money to customers.
Shares of Muthoot Finance rose 17.9% to a record Rs.246 on BSE before closing at Rs.230, up 10.2%. Manappuram jumped 20% to Rs.40.55.
Analysts attributed the rise to improved clarity following the panel’s recommendations.
“There is clarity on the future of gold loan companies. The report has given confidence to investors,” said Santosh Singh, analyst at Mumbai-based brokerage Espirito Santo Securities Ltd.
In a note released on Thursday, Edelweiss Securities said it continues to be positive on gold loan companies with a sustainable return on assets of 3.4-4% and return on equity of 20-25%.
Although the recommendation to raise the cap on the lending ratio is definitely a positive, the huge jump in stocks was surprising, said Deven Choksey, managing director and chief executive of KR Choksey Shares and Securities Pvt. Ltd, a brokerage.
“The recommendations, if implemented, will help the gold loan companies expand their loan book,” Choksey said. “However, it remains to be seen as to the extent to which they are accepted.”
The standardization of valuation of gold and increase in the ratio cap from 60% would help gold lenders to increase business volumes at a reasonable pace but the pace of growth is likely to be much lower than the over 120% compounded annual growth rate seen in the past three years, according to a report by rating agency Icra Ltd. The Rao panel has suggested that firms giving loans against gold need to follow proper disclosure standards, monitor the implementation of the fair practices code and standardize the documentation process. Most importantly, gold loan firms need to rationalize their interest rate structures, the panel said. Such companies typically charge 24-26% interest.
The apex bank’s concern on the gold loan industry stems from the uncontrolled growth of such firms in the past few years. The central bank is also worried about rising gold imports to India, which has put pressure on the current account deficit.
To tackle rising imports, the Rao panel has recommended introduction of gold-backed products to discourage investments in bullion, bars and jewellery. The central government is also planning to increase import duty on gold, finance minister P. Chidambaram said Wednesday.
The draft rules are ambiguous on the interest rate cap, although they say interest rate should be linked to a rate offered by banks, without specifying further, said Laxmi Ahuja, an analyst tracking gold loan companies at Marwadi Shares and Finance Ltd, which could have a negative impact on gold loan companies.
The draft has also recommended that gold loan companies should not offer gold bonds at their branches. Currently, such gold bonds account for 30% of borrowing at Muthoot and 5% at Manappuram, according to Ahuja.
The RBI draft report has proposed that any payment over Rs.2 lakh loan on gold jewellery should only be made in cheque and not cash, which is the current practice. Large companies with over 1,000 branches like Muthoot and Manappuram will have to get approval for new additions if it exceeds a 1,000 branches limit.
(Dinesh Unnikrishnan in Mumbai contributed to the story)