Pvt banks, NBFCs may be hit on RBI's take on gold loans

The last quarter before the closure of financial year, private banks are busy buying loans from non-banking finance companies to meet their 40 per cent priority sector lending target set by the banking regulator.

The Reserve Bank of India on Friday said that banks cannot show loan given against gold jewellery under priority sector lending. This news comes as a thunderbolt for both private banks and NBFCs specialising in loans against gold.

High interest rates

The move by RBI is due to the high interest rate charged on these loans – 18 to 24 per cent – and end-use of funds by the NBFC got from banks may not be for priority sector lending. These loans given against gold jewellery are called ‘bridge loans' as they for a short duration of three months usually taken by small traders and businessmen.

Impact greater on private banks

Mr S.K. Mishra, General Manager (priority sector), Indian Overseas Bank, said the impact would be greater on private banks compared with public sector banks. Public sector banks have a large network of branches in the rural areas and therefore easier to meet the priority sector lending.

The 40 per cent on priority sector lending is determined by the previous year's total advances given by banks. Although there is time from April to December, banks wait till January to March to buy these loans as the margins are less on loans and do not want to do till the closure of the financial year.

The rate would depend on the desperation of banks to buy and the bargaining capacity of NBFCs to sell. This year the determining factor would be the base rate.

Banks that are likely to have an impact are ICICI Bank, HDFC Bank, IDBI Bank, Yes Bank, ING Vysya Bank and Axis Bank.

Dearer for NBFC

Manappuram Finance, the only listed NBFC which provides loan against gold, had close to 40 per cent of its Rs 6,500-crore loan book fall under the priority sector lending as on December 31, 2010. Mr Nandakumar, Chairman, Manappuram, said, the impact of RBI's notification to be ‘marginal'. The cost of funds is expected to go up by one per cent, he said. Currently the NBFC is borrowing short-term funds from banks at 10.5 per cent.

In an earlier interaction with Business Line , Mr George Alexander Muthoot, Managing Director, Muthoot Finance, said that the advantage of selling these loans to banks is that they can mobilise funds at cheaper rate. Muthoot Finance is a big player in this segment, had a total loan book of Rs 7,342 crore as on March 31, 2010. The NBFC has filed its Red Herring Prospectus with SEBI a few months ago.

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