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May 20, 2012, 09.46 AM IST | Source: Moneycontrol.com

Reduce exposure to NBFCs giving gold loans: RBI to banks

In a bid to futher tighten regulations the Reserve Bank of India (RBI) on Friday asked banks to bring down credit exposure to a single non-banking finance company (NBFC),doing business of gold loans, from existing 10% to 7.5%. The regulator has given maximum six months to implement it.

Moneycontrol Bureau

In a bid to futher tighten regulations the Reserve Bank of India (RBI) on Friday asked banks to bring down credit exposure to a single non-banking finance company (NBFC),doing business of gold loans, from existing 10% to 7.5%. The regulator has given maximum six months to implement it.

"Banks are advised to reduce their regulatory exposure ceiling on a single NBFC, having gold loans to the extent of 50% or more of its total financial assets (loans), from the existing 10% to 7.5% of banks' capital funds (tier I + tier II capital)," RBI said in a circular.

"However, the above exposure ceiling may go up by 5%, i.e., up to 12.5% of banks’ capital funds if the additional exposure is on account of funds on-lent by NBFCs to the infrastructure sector."

Recently, RBI took a number of measures to stiffen norms for NBFCs, particularly those dealing in gold loans like Muthoot Finance , Manappuram Finance , Muthoot FinCorp and others. The measures included limiting loan-to-value (LTV) ratio to 60% for gold loans, mandating a minimum tier - 1 capital of 12% by April 1, 2014; and restricting NBFCs to grant any loan against bullion/primary gold and gold coins.

An LTV of 60% means that a borrower will have to give gold worth Rs 100 to get a loan of Rs 60.

"Our credit exposure to any single gold loan NBFC is mostly below 7.5%," an executive director of a Mumbai-based large state-owned bank told Moneycontrol.com on condition of anonymity.

"This RBI move may be aimed at ultimately curbing local moneylenders' business at the bottom of the society. Many moneylenders lend money at an exorbitant rate against the collateral of gold. They use the same stock of gold to borrow money from the gold loan companies relatively at much lower rate," he said.

Banks, according RBI, should have an internal sub-limit on their aggregate exposure to all such NBFCs. The rapid expansion of such NBFCs has led to their increased dependence on public funds, including bank finance.

"In recent time, RBI has been very harsh on gold loan NBFCs. The latest move will certainly affect their net interest margin. They may increase borrowing through commercial papers (CPs) and bond issues but at a higher cost of borrowing. However, market demand for gold loans is unlikely to wane as NBFCs have much greater reach than banks," said a treasury head from a Kerala-based gold loan NBFC. He did not wish to be named.

Due to prevailing regualtory concerns, investors are not ready to subscribe bonds or CPs issued by any gold loan company. Hence, they need to offer higher rate of interest to attract investors.

In March, Muthoot Finance had to extend its subscription closer date of non-convertible debenture issue offering 13-13.43% to raise Rs 500 crore.

Saikat Das
saikat.das@network18online.com  

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