Gold loan growth pace worries RBI; Muthoot, Manappuram hit

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Gold loan growth pace worries RBI; Muthoot, Manappuram hit

The Reserve Bank of India is worried about the scorching pace at which loans-against-gold have been growing of late, an official at the banking regulator told CNBC-TV18.

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Moneycontrol Bureau

The Reserve Bank of India is worried about the scorching pace at which loans-against-gold have been growing of late, an official at the banking regulator told CNBC-TV18. The two listed gold loan firms, Manappuram Finance and Muthoot Finance reported a strong growth in earnings for the third quarter, even as the overall demand for loans in the banking system has been shrinking. Reacting to the news shares of both the companies have fallen 5% and 6% respectively.

The central bank is now considering tighter regulations for the segment, the official said. This is could be in the form of limits on the loan that a gold loan firm can give as a percentage of the value of loan. This is also known as the loan-to-value. RBI may also restrict the maximum interest that a gold loan firm can charge its customers, and also the penalties that gold loan firms can impose.

At present, gold loan firms charge anywhere between 18-24% as interest. The interest rate also depends on the ticket size of the loan. Higher the loan-to-value, more will be rate of interest. The central bank is also considering rules to ensure better protection for customers availing gold loans. People who avail loans against gold are mostly from the unorganised sector, who do not have access to credit from banks.

Last year, the RBI had removed priority sector tag for loans given by banks to gold loan firms. What that meant was gold loan firms would have to pay market rates for borrowing money from banks, instead of the concessional rate they would get for a priority sector loan.

On Tuesday, the RBI barred Manappuram Finance from accepting accept public deposits, as it found out that the company had outstanding fixed deposits issued in the name of a privately-owned promoter firm. This led to a 20% fall in the stock price on Wednesday.

Also watch the accompanying video for CNBC-TV18's Latha Venkatesh's views...