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Economy

RBI Frowns on Gold-Backed Lending by Non-Banks

RBI just hurt Gold Loan companies who had big advertisements on TV and Radio (Mannapuram, Muthoot).

From Moneycontrol:

The RBI is keen that banks lend more to the agricultural sector. That is the reason why it has said that only direct loans given with gold as collateral, will be treated as priority sector loans. Loans to non-banking financial company NBFC or gold-loan companies for on-lending do not count. But this move will mean that gold-loan companies lose a major source of funds.

M Narendra, CMD, Indian Overseas Bank says, “If they are not provided funds by the banks, like you have seen in microfinance institutions (MFIs). They may have to look for their own capital or go for equity so that they continue to be in the business.”

Estimates peg the gold-loan market at around Rs 50,000-53,000 crore and 30% of this comes from NBFCs like Muthoot and Manappuram. But given that 75% of their funding comes from banks, growth in this sector is set to take a huge hit.

Rupa Kudva, MD, CRISIL says, “One fallout of the new regulation is likely to be moderation in growth rates. These are companies which have seen growth rate of 70-75% and we expect that growth rate will moderate to become anywhere between 40-50%.”

The point is not to curb the lending, but to remove it from the priority sector (which needs to be 40% of bank lending, and therefore gets a better interest rate). There is definitely no reason to give gold-backed lending a priority status anyway (it still holds such a status, if the banks do it directly).