RBI has taken the shine out of gold finance companies. With one stroke, the central bank has put a leash around firms like Muthoot and Manappuram, which have been growing at breakneck speed over the last few years.
RBI has imposed a cap of 60 percent of loan to the value (LTV) of gold. Further, it has also increased the Tier 1 capital of gold finance companies to 12 percent which is to be achieved by April 2014. Capital adequacy is not so much a problem, but pegging the loan outgo as a percentage of value is back breaking.
Organised gold loan companies have to compete with moneylenders who have been kept out of this purview. Moneylenders do not have any cap on the amount to be lent against the gold mortgaged.
Both the listed companies -Muthoot Finance and Manappuram Finance -are trading at the year's low prices, falling by over 10 percent today.
While regulation of gold finance companies was expected, many were expecting a cap on interest rates, as in the case of microfinance companies. However, a cap on LTV has taken the market by surprise. Manappuram, the more aggressive of the two companies (having a growth rate of 170 percent compared to 96 percent by Muthoot), will be severely impacted as it has a higher LTV of nearly 80 percent, while Muthoot in a press release has said that they are below the 60 percent mark.
There is still some clarity needed on the notification, as to whether this cap will be applicable to the existing portfolio or to new ones. What is clear, however, is that growth will be affected as customers can again go back to the moneylenders.
Further, margins of these companies are also expected to be hit as increasingly banks are getting in the fray for gold loans. The existing high net interest margins enjoyed by these gold companies have not only attracted the regulators but also competitor.
With their low cost of funds and wide presence, it will be easier for banks to bring down the rates. In fact analysts believe this regulation by the central bank will help the banking companies bridge the gap between them and gold finance companies.
The Rs 80,000 crore gold loan businesses was growing at 70 percent for gold finance and 35 percent for banks. With net interest margin (NIM) of 14 percent for gold finance companies despite the high cost of funds, banks flocked to the sector given their current NIM of around 3 percent.
As growth and margin contraction will now be the norm, valuation enjoyed by these companies will have to realign themselves with other non-banking finance companies (NBFCs).