Mumbai: Companies that have recently entered the gold loan business are taking another look at the move with the Indian central bank clamping down on the sector with tight regulations, even as existing firms expect a hit on their profitability due to this.
In March, the Reserve Bank of India (RBI) tightened gold loan norms for non-banking financial companies (NBFCs), citing the rapid growth of the business and rising risks. RBI capped the amount NBFCs 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.
While the RBI regulations restricted the ability of NBFCs to leverage, the LTV rules do not cover commercial banks engaged in the gold loan business. This has made the business unattractive for NBFCs, analysts and industry officials said.
SKS Microfinance Ltd, which had initially planned to offer gold loan business from 200 branches, is now planning to run the business at a slower pace, said Dilli Raj, chief financial officer.
“There is no escape from the fact that the return on assets of gold loan companies will get impacted in the face of new restricted regulatory environment. We will take a relook at the plan as the economics of this business has changed,” Raj said.
SKS is offering gold loans at 47 branches and has a Rs 24 crore book. The company will take a final call on the strategy after the completion of a pilot by the end of this fiscal, Raj said.
RBI wants to rein in the aggressive growth of gold loan-focused NBFCs. Leading gold loan NBFCs such as Manappuram Finance Ltd and Muthoot Finance Ltd have witnessed at least 70-100% business growth in the past few years.
The central bank is concerned about the rapid expansion both in terms of the size of the firms’ balance sheets and physical presence. Such firms are increasingly depending on public funds, including bank finance and non-convertible debentures issued to retail investors, RBI said.
According to industry estimates, the gold loan market in India is around Rs 3 trillion, of which Rs 50,000 crore each is with NBFCs and commercial banks. The remaining Rs 2 trillion is with the unorganized market which is primarily run by private money lenders.
Profitability and growth are likely to be hit by the new regulations, said Nischint Chawathe, financial analyst, Kotak Institutional Equities. “The returns will get affected though it is difficult to quantify the extent of decline on profitability. The new entrants will possibly want to wait,” Chawathe said.
Recently, RBI had asked banks to reduce their exposure to NBFCs that have gold loans as 50% or more of total financial assets. Banks need to reduce their regulatory exposure to a single company to 7.5% of their capital fund from the current 10% and set a sub-limit on their entire exposure to such gold loan companies, RBI said.
On Wednesday, Manappuram Finance rose 0.17% to Rs 29.8 and Muthoot Finance fell 0.89% to Rs 122.35 on BSE. Since the new norms came into effect in March, Manappuram has fallen 34.22% and Muthoot Finance has dropped 24.82%. During this time, the benchmark Sensex has dropped 2.56%.
Typically, LTV of most gold loan firms is about 73-75%. According to senior industry officials, with RBI capping LTV, gold loan products have lost their attractiveness as traditional customers are moving to private money lenders looking for better value for their gold.
According to industry officials, around 30-40% of the loans of these companies have been given at an LTV above 60%. Once these loans are recovered, new loans have to be given within the 60% LTV limit. The Association of Gold Loan Companies, an industry body, has approached RBI asking it to review the cap on LTV, said George Alexander Muthoot, managing director, Muthoot Finance. “Since LTV is capped, these customers will now go back to the moneylenders. We have expressed this concern to RBI. We know our risks very well,” Muthoot said.
Muthoot Finance is the largest gold loan NBFC in India, with a loan book of Rs 24,000 crore in December. The company, which has 3,700 branches across India, registered an annual growth of 55% in FY12 after 100% growth in FY11.
I. Unnikrishnan, managing director of Manappuram, said the company is expecting an impact on its books in the first two quarters of the fiscal due to a likely slowdown in the acquisition of new business and erosion in the customer base.
Vikas Mittal, business head, gold finance, Magma Fincorp Ltd, is not putting off plans to enter the gold loan business later this year, though he admitted that gold loan firms might not see the kind of growth they used to witness in the past. The NBFC, which is primarily engaged in asset-backed finance, plans to enter the gold loan business in the second and third quarter of the current fiscal, Mittal said.