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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.

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