Manappuram, Muthoot surge as panel moots higher loan value

Moneycontrol Bureau

Shares of Manappuram Finance and Muthoot Finance closed 20 percent and 10 percent higher on Rao panel's proposal that gold loan firms be allowed to lend 75 percent against the value of gold pledged, against 60 percent as is the norm now. Trading in shares of Manappuram Finance was frozen at the upper end of the 20 percent intra-day circuit filter at Rs 40.55, and Muthoot Finance shares closed 10 percent up at Rs 230.

Brokerages tracking these stocks had cited clarity on regulations for the sector as one of the triggers for re-rating of the stocks.

(More on panel suggestions)

Both stocks had underperformed the broader market in 2012 by a huge margin. Manappuram shares declined 24 percent and Muthoot Finance rose barely 8 percent.

Gold loan firms benefit from a higher loan-to-value ratio, as they charge very high rates of interest (anywhere between 18-24 percent depending on the loan-to-value). Last year in March, the RBI had capped the LTV at 60 percent to curb the rapid growth of gold loans, which the central bank felt posed risks to the system. That sparked a sell-off in gold loan firms. The central bank had also proposed capping the interest rates charged by gold loan firms.

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The Rao panel, however, has not suggested a number to the maximum interest rate that can be charged by gold loan firms.

Likely cap on interest rates is the other main cause of worry for investors in shares of gold loan companies. The Rao panel has put the onus of fixing the limit on the RBI.

"Some NBFCs do resort to unethical practices in charging high interest rates. Therefore, there are sufficient grounds to rationalise the interest rate
structure including the penalty for default in repayment," the Rao panel report said.

"It may be prescribed that the gold loans NBFCs may adopt an interest rate linked to a bench mark rate like bank rate or State Bank of India’s maximum advance rate," the report said.

At the same time, the panel has said that unbridled growth of branches by large gold loan NBFCs needs to be moderated as many branches lacked basic amenities and posed a risk to the gold pledged there.

"There appears to be a justification for imposing the requirement of an approval for the new of branches an NBFC, which has already expanded beyond say 1000 branches, they can open in a year"  the report said.

The panel has recommended that gold loan companies shore up their capital adequacy ratio by infusing their own funds. It has also called for tighter rules to deter retail investors from subscribing to non-convertible debenture (NCD) issues of gold loan firms.

In addition, gold loan companies will have to communicate the terms of their loans more transparently.

"The widely prevalent practice of issuing a small pawn ticket needs to be replaced with proper loan contract indicating all the applicable terms and levies and penal interest charges transparently," the report said.