Muthoot Finance Ltd on Thursday hailed the Reserve Bank of India move to tighten lending norms of NBFCs that are predominantly engaged in lending against gold jewellery.

Besides stipulating that loan-to-value (LTV) ratio should not exceed 60 percent, the RBI has also mandated that such NBFCs should maintain a Tier-I capital of 12 percent by April 1, 2014.

The Central Bank on Wednesday said in a circular that these NBFCs should not grant any advance against bullion/primary gold and gold coins.

These measures will go a long way in ensuring that the players in the industry would have robust capital structure to address any possible fall in gold prices, Muthoot Finance said in a statement here.

The company said that it had a Tier-I capital of 13.37 per cent as on December 31,2011 and pointed out that the revised framework provide time till April 1, 2014 to achieve the level of 12 per cent.

Muthoot Finance also said that it does not provide loans against bullion/primary gold and gold coins. Lending is done only against security of household used jewellery, the statement added.

Although the company sought to provide comfort to stakeholders that it was in a position to conform to the RBI’s latest lending norms, its shares saw a battering in the stock exchanges. At the national stock exchange, the company’s share closed at Rs 145, reflecting a little over 10 per cent decline from previous day’s close of Rs 162.45 per share of Rs 10 each.

Muthoot Finance saw the RBI’s latest measures as primarily aimed at new entrants to the sector. The steps taken with respect to capital adequacy and LTV should be seen as steps to strengthen the sector with robust operating practices and risk control measures, the statement added.

Interestingly, Muthoot Fincorp, another gold loan company, had a slightly different take on the latest RBI move. It feared that the latest move could have the effect of setting back the industry by years together. People who depended on the product may move back to the unorganised sector, the company said.

(This article was published on March 22, 2012)
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