Manappuram Finance shares were down 14% to Rs 39.15 and Muthoot Finance shares down 9% to Rs 148.45 in the first hour of trade following the RBI circular late Wednesday evening, restricting loans by gold finance firms to 60% of the value of gold jewellery pledged as collateral.
Manappuram Finance shares were down 14% to Rs 39.15 and Muthoot Finance shares down 9% to Rs 148.45 in the first hour of trade following the RBI circular late Wednesday evening, restricting loans by gold finance firms to 60% of the value of gold jewellery pledged as collateral. Currently gold loan companies are said to be lending as much as 75% of the gold value. Higher the loan as a ratio of the gold pledged, more the interest rate.
Gold loan companies charge anywhere between 18-24% as interest depending on the loan to value (LTV). So the RBI move could have an impact on the margins of gold finance companies. In addition, these companies will now have to maintain a minimum equity capital of 12% as a proportion of their loan book, if half of their assets are in gold. This rule, though is not seen to be as as damaging as the one capping LTV, as leading companies like Muthoot and Manappuram are adequately capitalized for now. But should the equity market remain sluggish and the demand for gold loans increase, it could pose a problem for gold financiers, as they will have to dilute more equity than they would like to.
Last week Manappuram Finance promoters sold a 4.75% stake in the company at Rs 40 a share, close to a two-year low for the stock, and well off the Rs 168 it had got from institutional investors for a qualified institutional placement (QIP) in November 2010. Shares of Muthoot Finance, which listed in May last year, too have had a lackluster run. The stock today is trading 16% below its issue price of Rs 175.
The latest RBI rules for the sector have not come as a surprise. For the last couple of months, market has been abuzz with talk of the central bank planning to cap the loan to value for gold loan companies. To that extent, the market had partly priced in the negatives resulting from such a rule. Gold financing has been under the RBI scanner for some time now, following the sharp rise in gold-backed financing activity. In a bid to insulate the banking system from any shock arising from a steep fall in gold prices, the RBI last year ruled that loans by banks to gold finance companies for onward lending would no longer be treated as priority sector lending. Loans under priority sector lending have a lower interest rate, so the RBI move marginally pushed up funding costs for gold loan companies.
In February this year, the RBI warned Manappuram Finance promoters against accepting public deposits even if this was being done in their personal capacity. The message was clear: RBI is closely monitoring every development in the gold loan segment. Gold loan business was a hit with investors in 2010 as they felt the juicy margins could be sustained indefinitely. The reason was simple. It is usually the low income group which form bulk of the clientele of gold loan firms. These people do not have access to bank loans and hence are forced to borrow at the high rates being charged by gold financiers. Also, family jewellery being an emotional issue as much as a physical asset, few defaulted on their loans. But with the RBI tightening some of the rules, the days of high margins may well be past for gold loan companies.