Here's what the latest RBI norms mean for gold loan cos

The Reserve Bank of India (RBI) has released a new set of reforms that requires appropriate infrastructure for storage of gold ornaments. This had lead to some correction in gold loan companies like Manappuram and Muthoot. CNBC-TV18’s Latha Venkatesh reports that the new reforms are more like a code of conduct.

The reform is not increasing provisioning risk weights and it won't compress margins They are more routine reminders like, gold loan companies should ensure that they have very strong vault arrangements to store the precious metal.
 
The second one that may cause some problems later is that prior approval of RBI will now be needed for opening branches in excess of 1,000 in numbers. So, when a company rises above 1,000 branches, there will be an issue. So, the biggest gold companies could have an issue over here, in the sense that their expansion could get delayed. The standard rule is that a company has to give loans only upto 60 percent of the value of the gold. Now, what is value of the gold? Instructions already indicate that the company should remove the stones and other precious items that comprise the gold jewellery, but how does one value gold? RBI has given some rules today saying that they should take the average price of 22 carat gold, not 24 which is obviously priced higher as gold jewellery is made in 22 carat. So, one should you take the 30 days average as declared by the Bombay bullion association and arrive at the 22 carat price. If it is not 22 carat, one should appropriately discount the value of the gold and then give 60 percent of the value. Some rules reiterated on ensuring the know-your-client (KYC). Now the question is, how does one ensure KYC of gold jewellery especially when it is over 20 gram gold being pawned. The board has to put in rules, these are difficult to follow because so much of gold is ancestrally inherited in India. Finally, there are rules with respect to auction process that the auction should take place in the same taluka; that the company should put up a reserve price below which it will not sell the gold and that will be 85 percent of the price of that gold. What happens is that very often or at least it is alleged, that gold companies auction the gold and it is ready to go at a throwaway price because the buyer has not been able to buy. It is usually group companies which come in and buy. These are allegations and these kind of rules just prevent all these, these are all not margin constraining. I spoke to several people who track these gold companies and they are not changing their EPS or any estimate.