A Reserve Bank of India (RBI) panel has given a stamp of legitimacy to gold loans by non-banking financial companies. Shares of Manappuram Finance Ltd hit the upper circuit of 20%, while that of Muthoot Finance Ltd reached a new high. After the central bank moved to restrict the breakneck expansion of gold loan companies last February, both firms had underperformed the broader market.
Muthoot shares gave up some of their gains later in the day owing to a couple of reasons. One, the company trades at 2.36 times its FY13 book value, at a premium to most private banks in the country. Second, and more importantly, while the expert panel’s recommendations bring some clarity to the regulations surrounding this business, they are not all that positive for gold loan firms.
For instance, while the committee has recommended allowing these firms to advance up to 75% of the value of the precious metal, commonly known as the loan-to-value (LTV) ratio, this suggestion comes with riders. Previously, RBI had cut this to 60% owing to which the amount of gold pledged and growth for these firms tumbled.
The panel has said that the LTV calculations should be done in a standard manner. It has suggested using a 30-day average of prices of 22 carat gold in the Mumbai bullion market and also excluding making charges, taxes, etc. Thus, as the illustration in the committee’s own report shows, increasing the LTV value to 75% doesn’t significantly alter the loan amount per unit gram of gold.
State Bank of India’s lending rate, the biggest negative—if it comes to pass—is the recommendation that the central bank imposes a cap on gold loan rates. Thirdly, the panel has also called for examining whether funds raised by floating secured debentures should be exempted from the definition of public deposit. Currently, about 5% of Manappuram Finance’s total borrowings are under this route, while Muthoot’s debentures constitute 30%, according to Edelweiss Capital Ltd.
Still, given that the panel sees no systemic risks to the banking industry from gold loan companies, the latter should be able to raise funds more easily from this source as also from commercial paper sales. While the new-found legitimacy surrounding their business model should see the stocks gain, given that they had been beaten down, earnings are unlikely to gain at the same pace.