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Commentary

RBI: Gold Loans at 60% of Value, No Coins Please

RBI has changed the rules for the Gold Loan NBFCs. They now need to only lend upto 60% of the value of jewellery, with the change in "Loan-To-Value” (LTV) norms. The value of jewellery, if it has to be resold, will be substantially lower than to it is to buy the same jewellery (due to weird terms like “wastage” and “making charges”) – the difference, in my experience, is 10% to 20%. This rule provides another cushion for gold price movements.

What happens if they’ve lent Rs. 60 for jewellery worth Rs. 100, and gold falls by 10%? With the new value of Rs. 90, they have to, at max, lend Rs. 54 – which means they must demand Rs. 6 back from the borrower? This can be a huge game changer; just the two big boys in the gold NBFC space (Mannapuram and Muthoot) have over 35,000 crores of loans outstanding.

Such NBFCs can only lend against gold jewellery, not gold coins or gold bullion. This is strange, because gold coins and bullion have a much better resale value. I don’t know what the logic is. (Btw, this applies only to Gold NBFCs, apparently banks can lend against coins)

Additionally, Gold NBFCs (which have more than 50% of their assets in gold loans) will need to have a Tier 1 capital of 12%, by April 1, 2014. This is TWO years away.

(Also, Muthoot’s Q3 presentation shows a Tier 1 capital ration of 13.37% and Mannapuram’s of 18.37% – both above the 12% mark. But will they stay there with the new LTV?)

Mannapuram Finance and Muthoot Finance are both down over 10% in the market today.

  • Raja says:

    Hi Deepak,
    Regarding the line “(Btw, this applies only to Gold NBFCs, apparently banks can lend against coins)”
    As per the Muthoot’s press release today.
    “As far as financing against bullion and gold coins, banks had already been prohibited from
    this type of financing and the Company has also been following this practice.”

  • Ashwin says:

    Does this impact the NCD’s or deposits given by these companies?

  • Praveen says:

    HDFC provide loans against gold bars

  • Krish says:

    Some thing seriously going wrong with this Gold NBFCs. Recently RBI prevented them to renew the FDs. Now 2 critical directives 1. reducing LTV and 2. Barring coins/bars/biscuits.
    Looks like the tremendous growth of these Gold NBFCs each year with mobilization of the funds from the public in the form of FD and NCDs may reached a point of non-ignorable risk to the public money should the price of the gold nosedive. Even NPAs might be rising and leading to more auctions of the gold in recent times.
    The industry of this size certainly needs controls in the interest of public money.

  • Px says:

    No Gold coin bar is something expected as govt and its debt issuer RBI wants to dissuade purchase/liquidity of investment physical gold… due to the large current account deficit?
    Funny is this a signal that RBI will look more at growth than at inflation , and keep the money presses running ?

  • Sonny jacob says:

    It appears banks are playing yet another dirty game. These NBFCs are more investor friendly than most of the banks. Look at the ROE for the past few years. Such irrational moves by RBI will make retail investors loose confidence in financial sector.