From the heady days of 20-25% interest rates on gold loans, non-banking finance companies (NBFCs) are bracing for a relatively sober 18-20% rates, thanks to a clutch of factors: tighter regulations, controversial deposit-taking activities and tough business conditions.
Consequently, as the present turns challenging, the recent past appears a golden phase in retrospect, while future seems uncertain. The downtrend started in late March when the Reserve Bank of India (RBI) put a 60% ceiling on the loan-to-value (LTV) ratio, one of the most competitive aspects of gold loan companies.
“It’s possible to obtain 80% finance against a vehicle which sheds 30% of its value in the very first year. In a gold loan, where the underlying security is immune to depreciation, you get only 60%,” lamented I Unnikrishnan, MD of Manappuram
Finance, a leading gold loan NBFC.
The `70,000-crore organised gold loan industry, comprising NBFCs, banks and other entities, is led by Manappuram and Muthoot Finance (not Muthoot Fincorp). Both firms account for about 90% of the total gold loan book, and manage assets of nearly `35,000 crore.
Not so long ago, when their LTV ratios were in the 70-75% band, they coasted on interest rates of almost 25% on their gold loans. Now, they will be forced to charge lower rates which will shrink their profits, experts said.
For instance, analysts from Emkay Global Research wrote in a report about Manappuram Finance thus: “Interest rates also need to fall in line with lower LTV ratios. We believe they should be in the range of 18-20%. This will result in 5% contraction in net interest margins to 10% in FY13. With high operational expenditure structure, gold loan NBFCs’ profits will get wiped out entirely.”
However, Thomas John Muthoot, CMD, Muthoot Fincorp (whose LTV ratio earlier was 73%), sees the recent turn of events as a necessary regulatory move. “Smaller lenders who enter this market use the LTV ratio as a competitive tool. This (new RBI) ceiling will help in avoiding LTV wars.”
That’s precisely what the banking regulator tried to preempt after being spooked by runaway growth in the sector. In its April monetary policy, in a bid to prevent concentration, the RBI constituted a working committee to study gold demand, trends in gold prices and lending by NBFCs against gold.
Adopting a rather stern tone, the RBI also announced a cut to 7.5% from 10% in bank exposure to any single gold loan NBFC.
Not a very large cut, but the regulator’s tone is expected to ensure that gold loan NBFCs will face a tough time in getting bank finances. (As banks don’t reveal company-wise exposure, it is not possible to reveal which player tops the list of gold loan NBFCs that have received bank financing.)
Earlier, the RBI had directed these companies to keep a minimum Tier-I capital of 12% by April 1, 2014, up from the previous limit of 10%. It also restricted them from lending against primary gold and gold coins.
“No doubt, the RBI has a key responsibility to prevent downside risks from materialising, but surely not in ways that bottle up the upside potential as well. It’s therefore desirable that the RBI should take a fresh look at the issues, this time in full consultation with stakeholders,” Unnikrishnan of Manappuram