Past boom unlikely to be repeated

Gold financing firms will need to relook their business model as the Reserve Bank of India’s new, tightened norms are likely to hurt growth, according to analysts.

Uncomfortable with the systemic risks involved in the extant lending model, the RBI on Tuesday issued new guidelines on gold loans by non-banking finance companies (NBFCs) to bring in more transparency.

Prakash Agarwal, Associate Director - Banks, India Ratings, said: “It is positive from the systemic point of view and will reduce risks. From the companies’ point of view, the portfolio of gold loans could see a further downside for the next three-four quarters. Amid the recent downturn in the business, we could also expect some de-growth.”

Further trouble

NBFCs such as Muthoot Finance and Manappuram Finance, which are largely into gold financing, will further face troubles going forward.

Both companies were not reachable for comment.

According to Agarwal, the entire disbursement of the loan is by cash as the borrowers are largely not savvy with the documentation process.

paper tedium

Hence, the new requirement to bring in more paperwork can put off the borrowers and they could shift to banks or the unorganised sector to meet their gold loan requirements.

Vaibhav Agrawal, senior analyst at Angel Broking, said: “The strength of these firms was to disburse faster loans.

“However, the new rules may deter borrowers from going through the longer processes and in turn prefer banks, which also have lower interest rates.”

According to him, the firms also need to consolidate their smaller branches.

The business model will need to be relooked at as this will incrementally impact the gold loan business.

The boom that the gold loan business saw in the past is unlikely to be repeated, Agarwal added.

Muthoot Finance ended 8.28 per cent weaker at Rs 103.60 per share, while Manappuram Finance closed 4.62 per cent down at Rs 15.50 on the Bombay Stock Exchange.

beena.parmar@thehindu.co.in

(This article was published on September 17, 2013)
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