Why RBI review is a dampener for Muthoot, Manappuram

Shares of gold loan companies are trading lower after the Reserve Bank of India cut banks’ credit exposure to gold loan from 10 percent to 7.50 percent.

Kerala-based Muthoot Finance was trading at Rs 128, down nearly 3 percent while Manappuram tanked more than 5 percent to Rs 32.

“Banks should reduce their regulatory exposure ceiling in a single NBFC, having gold loans to the extent of 5 percent or more of its total financial assets, from the existing 10 percent to 7.5 percent of bank’s capital funds,” RBI said in the policy statement.

RBI’s measures will check the risks associated with the rapid growth of non-banking financial companies (NBFCs) that are engaged in lending against gold jewellery. By limiting banks’ lending exposure, the cost of borrowing for the non-banking finance companies are expected to go up. This in turn, would force the companies to pass on the higher rates to their customers.

“However, exposure ceiling may go up by 5%, i.e., up to 12.5% of bank’s capital funds if the additional exposure is on account of funds on-lent by NBFCs to the infrastructure sector. Banks should have an internal sub-limit on their aggregate exposure to all such NBFCs, having gold loans to the extent of 50 per cent or more of their total financial assets, taken together.”

The RBI earlier tightened its noose around gold loan companies by limiting the loan to value ratio of these companies at 60 percent for loans against collateral of gold jewellery and a minimum Tier 1 capital of 12 percent by April 1, 2014. While capital adequacy is not so much a problem, pegging the loan outgo as a percentage of value is back breaking.

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.

However, Oomen Mammen seems to be unfazed by RBI’s advice. In an interview to CNBC-TV18, Mammen drummed down the effect of the RBI’s advice to banks to limit their exposure to the gold-NBFC sector to 7.5 percent. He is hopeful that the cut in repo rate will reduce the interest rates on the company’s borrowings.