RBI chokes cheap funding to gold loan companies

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RBI chokes cheap funding to gold loan companies

The Reserve Bank of India (RBI) has choked cheap funding to gold loan companies by removing the priority sector status they enjoyed, reports CNBC-TV18’s Gopika Gopakumar and Vidhi Godiawala.

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Excerpts from India Business Hour on CNBC-TV18 Watch the full show »

The Reserve Bank of India (RBI) has choked cheap funding to gold loan companies by removing the priority sector status they enjoyed, reports CNBC-TV18's Gopika Gopakumar and Vidhi Godiawala.

The RBI is keen that banks lend more to the agricultural sector. That is the reason why it has said that only direct loans given with gold as collateral, will be treated as priority sector loans. Loans to non-banking financial company NBFC or gold-loan companies for on-lending do not count. But this move will mean that gold-loan companies lose a major source of funds.

M Narendra, CMD, Indian Overseas Bank says, "If they are not provided funds by the banks, like you have seen in microfinance institutions (MFIs). They may have to look for their own capital or go for equity so that they continue to be in the business."

Estimates peg the gold-loan market at around Rs 50,000-53,000 crore and 30% of this comes from NBFCs like Muthoot and Manappuram. But given that 75% of their funding comes from banks, growth in this sector is set to take a huge hit.

Rupa Kudva, MD, CRISIL says, "One fallout of the new regulation is likely to be moderation in growth rates. These are companies which have seen growth rate of 70-75% and we expect that growth rate will moderate to become anywhere between 40-50%."

However, RBI says the circular is aimed at regulating the end-use of bank funds and not really to choke funds to gold-loan companies

KC Chakrabarty, Deputy Governor, RBI adds, "If gold loan companies are lending at very high rates to customers, they should not utilise banks' money under priority sector. I am not saying that bank should no lend money, if bank-lend money is not treated as priority sector, banks can still lend money to gold companies having that record."

Given strong growth rates, many of these companies had even planned IPOs this year and these issues may take a hit as well, since funds will now cost around 200-350 basis points more. This will dent performance and growth.

Also watch the accompanying video.