RBI cap on cash for gold loans keeps non-banking finance firms under check

Gold financing companies Manappuram Finance and Muthoot Finance witnessed selling pressure at the bourses on Friday after the Reserve Bank of India said NBFCs cannot lend more than ₹20,000 in cash against gold.

After touching a low of ₹89.50 intraday, the stock of Manappuram Finance closed at ₹90.50, down 4.54 per cent, on the BSE. Muthoot Finance recovered from its day’s low of ₹326.65 to close at ₹337.95, still down 3.85 per cent.

The earlier provision for NBFCs was that high-value loans against gold was ₹1 lakh. The RBI now has reduced the amount to ₹20,000 in line with the provisions of the Income Tax Act.

Kotak Institutional Equities has retained a cautious view on NBFCs. “We interpret this as being applicable to loan disbursements and repayments across all categories of NBFCS. This will reduce the ability of NBFCs to accept partial or full loan repayment in cash thus reducing their leeway on the collections front,” Kotak Institutional Equities said.

“The new regulations also prescribe a cap of ₹20,000/borrower which we believe will include all outstanding loans to the borrower that could likely incorporate a significant part of MFI loans as well. Thus, non-cash payment of micro-finance loans may pose a challenge; we believe the industry will seek clarification from the RBI on the applicability of these regulations on microfinance loan repayments,” it further said.

“We await more clarity on the impact of the aforesaid regulations before revising our estimates and price targets,” Kotak Equities said in a report.

“Current rich valuations of most NBFCs do not provide any room for such developments. We retain our cautious view on NBFCs operating in the cash ecosystem; reiterate reduce on Bharat Financial Inclusion, Mahindra Finance and Shriram City Union Finance,” the report said and added Shriram Transport Finance’s inexpensive valuations may cushion the downside.

Most gold loans of Muthoot Finance and Manappuram Finance are below ₹1,00,000 and disbursed in cash, the brokerage said. Muthoot Finance’s average loan size is ₹35,000-40,000 . In case of Shriram City Union Finance, gold loan comprises about 15 per cent of total loans, and about 60-70 per cent of this are retail loans that may be in cash.

In case of Bharat Financial Inclusion, the average ticket size of income generating loans in October-December was ₹21,955, while that of medium- and long-term loan was ₹20,700 and ₹38,079, respectively. The company may face challenges for weekly collections in the electronic format, said Kotak note.

However, not all are perturbed over the RBI move. According to a few analysts, gold loan disbursements by most NBFCs are already taking place either in cheque format or through e-transfer. The new move by RBI may not impact these firms in the long run, they added.

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