Mumbai: The Rs 1 trillion organized gold loan market is implementing a code of conduct in an attempt to rebuild the image of lenders that took a beating after a recent clampdown by the Reserve Bank of India (RBI).
The “fair practice code” released by the Association of Gold Loan Companies (AGLC), the industry body, prohibits non-banking financial companies (NBFCs) that lend money to borrowers with gold as collateral, from charging excessive interest rates. The companies also have to disclose the interest rate, processing fee and other service charges levied on customers.
The code, which has to be accepted by all NBFCs that are lending against gold, also bars lenders from resorting to “undue harassment” of the borrower by “persistently bothering the borrowers at odd hours” and use of muscle power to recover loans.
To ensure “best practices of corporate governance,” the code of conduct also directs gold lenders to induct independent directors to constitute at least one-third of their governing board and an audit committee with an independent director as chairman on the lines of commercial banks. The code has been put in place after RBI, through a series of guidelines announced in recent months, tightened regulations for NBFCs engaged in the business of lending against gold ornaments, typically charging interest rates of 24-26%. RBI capped the maximum amount such NBFCs can lend to borrowers against the value of pledged gold and limited the amount commercial banks can lend to gold loan companies.
“The code of conduct is an effort to bring in good corporate governance practices to the gold loan sector, client protection in particular,” said George Alexander Muthoot, managing director of Muthoot Finance Ltd and president of AGLC.
Experts said the fair practice code was an effort by gold lenders to win back the favour of RBI and improve customer confidence. “Transparency is a key factor of any maturing industry. The idea of bringing in regulations could be a way of conveying (to) the regulator and customers that the industry is focusing on corporate governance,” said Abhinav Sharma, assistant general manager, NBFCs, at Care Ratings.
NBFCs such as Muthoot Finance and Manappuram Finance Ltd account for half the organized gold loan market in India; commercial banks make up the rest. The unorganized sector, made up mainly of private money lenders, is worth about Rs 2 trillion. Fading sheen of the gold loan industry is reflected in the stock market. Since January, shares of Muthoot have lost 20.48% and Manappuram 49.19% on BSE while the benchmark Sensex rose 4.52%.
To rein in the aggressive growth of gold loan-focused NBFCs, RBI first acted in February 2011 by removing the priority sector status it accorded to loans advanced by commercial banks to NBFCs for on-lending the money against gold pledged by borrowers. In March this year, RBI further tightened norms for NBFCs by capping the amount they can lend against gold, or the loan-to-value (LTV) ratio, at 60%, besides raising the capital requirement from 10% to 12% by April 2014. RBI also asked banks to reduce exposure to NBFCs where gold loans make up 50% or more of total financial assets by reducing the regulatory exposure to a single company to 7.5% of their capital fund, from 10%.
I. Unnikrishnan, executive director and deputy chief executive officer, Manappuram, said gold loan companies might also look at the possibility of capping the maxmium interest rate at 24-26%.