Comments
Non-banking finance companies (NBFCs) which lend against gold may see lower loan book growth and lower net interest margins, after the RBI's new restrictions on gold loans.
Among various measures proposed, the proposal to cap the loan-to-value (the amount of loan to the value of gold pledged) at 60 per cent may significantly impact the profitability of gold loan players.
These companies have also been asked to maintain a Tier-1 ratio of 12 per cent. They are required not to lend against gold coins or bullion. Gold financing companies already do not extend such loans.
Muthoot Finance and Manappuram Finance, which are only engaged in gold financing, and Shiram City Union Finance, a diversified consumer financing company, have significant exposure to gold loans.
Other companies such as India Infoline Investment Services, Future Capital Holdings, Cholamandalam Investments, and Fedbank Financial Services have ventured into the gold financing business.
Loan book growth
The loan-to-value (LTV) ratios of Muthoot Finance and Manappuram Finance as of December 2011 were 68 per cent and 69 per cent, respectively. However, loans may be extended for up to 85-90 per cent in some cases.
This suggests that both may have to cut back on this ratio. They may have to do this by demanding higher collateral when loans come up for renewal.
New borrowers will now have to pledge more gold for the same loan amount. The same holds true for borrowers who extend their loans. This suggests that gold loan companies may have to shrink their loan book for the same gold holdings. The gold loan book of the above companies may decline by about 13 per cent.
This new provision may also result in customers going to banks instead of NBFCs for gold loans. Customers currently prefer NBFCs due to their higher loan to value and quicker processing times.
Interest rates on gold loans may be lower when taken from banks. Any such shift of business may force NBFCs to cut interest rates and take a hit on their margins.
Impact on margins
The other key impact for gold NBFCs may come from lower lending rates. NBFCs currently offer gold loans at higher rates for customers who want a higher loan to value.
With the fall in LTV to 60 per cent, there may be a uniform rate at which they may have to lend at rates far lower than current yields.
For instance, in the latest December quarter, Manappuram realised an average rate of 26 per cent on its loans, mainly because a majority of loans had an LTV of more than 70 per cent. Post-regulation, this segment may have to be lent at lower rates.
One possible respite for the NBFCs could be if the RBI allows to take into account the making charges and value of stones in calculation of LTV.
As these provide additional 10-15 per cent cushion to the company, the actual impact can be lower than stated above.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.