RBI norms on NBFCs a positive in the long run

The RBI’s recent guidelines for the gold loan sector will significantly moderate the growth and profitability over the next year, said a Crisil report.

“Business growth is likely to fall from 80 percent per annum to 20-25 percent per annum and return on assets (RoA) is expected to fall from the currently high level of 4.5 per cent to 2.5-3 percent,” the rating agency said.

However, the RBI guidelines will have an overall positive impact on the sector over the long-term, as these will reduce regulatory uncertainties that the sector has witnessed in the recent past and enhance stakeholders’ confidence, it said.

The guidelines will also significantly enhance the gold loan companies’ ability to absorb the impact of any sharp decline in gold prices, thereby improving the sector’s asset quality in the long term, it said.

The average LTV offered by Manappuram Finance on its gold loans amounts to 66 percent. As a result of RBI’s latest directive, the LTV offered by the company would come down to be on par with the guidelines.

In this context, V P. Nandakumar, executive chairman of Manappuram Finance said, “We are of the opinion that the new RBI measures will ultimately strengthen the well-capitalized established players in the business with sound operating and risk management practices. It addresses the risks to the sector arising from the entry of multiple new players lacking the experience or the required understanding of the nuances of the business.”

Muthoot Finance said these steps will help the sector have steady growth as the industry has attracted a lot of new entrants in the recent past leading to risky practices.

“The stipulated higher 14 percent CAR and capping LTV (loan to value ratio) at 60 percent will strengthen the well-managed existing gold financiers and curb the reckless practices of recent entrants,” the Thiruvananthapuram-based Muthoot Fincorp director George Muthoot told PTI.

However, analysts also feel that int he short term, the rules will erode their margins. “The RBI measures are negative for the gold financing NBFCs as it will erode their margins and curtail their future growth rate,” said Angel Research vice-president for banking Vaibhav Agrawal.

RBI regulations cap the loan-to-value (LTV) ratios on lending against gold jewellery at 60 per cent (compared with the current average LTV ratio of around 75 per cent) and mandate a Tier 1 capital adequacy ratio (CAR) of 12 per cent, it said.

The LTV cap is likely to result in significantly lower growth rates, as the borrowers will have to bring in additional jewellery to avail of a loan of the same amount, it said.

In addition, it said, this development could result in business volumes shifting to the unorganised sector, which will continue to extend loans at higher LTV ratios.

The currently high profitability of gold loan companies may also moderate, as these companies are likely to reduce pricing to protect their market shares and prevent a shift to the unorganised segment, it said.

PTI