The Reserve Bank of India (RBI) on Wednesday directed non-banking finance companies engaged in gold loan business to maintain a loan to value (LTV) ratio of 60%. Those NBFCs whose financial assets consist of loans against gold jewellery to the tune of 50% or more will have to maintain 12% tier I capital.
The Reserve Bank of India (RBI) on Wednesday issued a notification directing all non-banking finance companies engaged in gold loan business to maintain a loan to value (LTV) ratio of 60%. This means, a borrower has to pledge gold jewellery worth Rs 100 to get a loan of Rs 60.
"Lowering of LTV would not impact our business. The number of pledges will increase only," a top official from a Kerela based gold loan company told Moneycontrol.com on condition of anonymity.
"Typically, small shop owners or people from unorganised sector take gold loans under emergency situation. Those people will not stay away from taking gold loans just because they have to pledge more gold jewellery. We do not expect any erosion of the profit margin," he said.
The existing LTV ratio for gold loans, according to industry players, is in the range of 65-75%. On an average the ticket size of such loan is around Rs 32,000-35,000 with 4-6 months tenure. Companies charge 12.50-20% rate of interest depending on the loan value and tenure.
"We are yet to (summerise) our comments on this. Our LTV is currently at 65%," Thomas George Muthoot, director Muthoot Fincorp told Moneycontrol.com briefly.
"Given the rapid pace of their business growth and the nature of their (gold loan companies) business model, which has inherent concentration risk and is exposed to adverse movement of gold prices, as a prudential measure, it (measures) has been decided,” RBI said in a release.
Those NBFCs whose financial assets consist of loans against gold jewellery to the tune of 50% or more will have to maintain 12% tier I capital from April 01, 2014. The share of gold loans should be shown in the balance sheet in percentage terms. Moreover, NBFCs should not extend any credit against bullion/primary gold and gold coins, according to the regulator.
“The mandated ceiling of 12% will not have any immediate impact on us. Most of the frontline gold loan companies on an average enjoy 14-15% tier I capital. As we expand our business, we will consider raising money through private placements, subordinate debt and follow on public offers,” said an official from another south based gold loan company, who did not wish to be named.
In the last one year, shares of Muthoot Finance and Manappuram Finance , India's two listed gold loan companies dropped nearly 7.50% and 22% respectively as against a fall of around 3% in the 30-share Sensex. The journey for gold loan companies has been fraught with regulatory concerns.
Last year, RBI had removed priority sector status from gold loan companies, which led to higher cost of borrowings for those companies.
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READ MORE ON Reserve Bank of India , RBI, gold loan companies, LTV, 60%, 12% tier I capital, Muthoot Fincorp , Muthoot Finance , Manappuram Finance, saikat das
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