Business Environment To Remain Challenging For Gold NBFCs

In a recent directive the RBI has asked the non-banking financial companies (NBFCs) not to exceed the Loan To Value ratio (LTV) 60 per cent for the loans against the gold assets. This has come after the RBI’s observation that there is increased dependence of such NBFCs on the public funds (in terms of bank loans and non-convertible debentures). The RBI in its note has also said that the business model of these NBFCs is exposed to high volatility in gold prices.

The apex bank has also asked to disclose the percentage of such loans to their total assets in their balance-sheet. Besides, NBFCs engaged in lending against gold jewellery have also to maintain the Tier I capital of 12 per cent by April 1, 2014. The NBFCs are also asked not to lend against bullion / primary gold and gold coins.

Post this regulation, the shares of Muthoot Finance have lost 8.42 per cent while that of Manappuram Finance have tanked by 18.8 per cent. This regulation is seen negatively by the markets and the business of these companies will remain very challenging going ahead.

The loan to value is a ratio which indicates percentage amount against the collateral a financial institution can lend to the borrowers. In case of gold this amount is now capped at 60 per cent by the new RBI norms. The regulation however would not affect the banks.

After this new regulation the demand of the gold loans would witness some slowdown as the volumes may go down. The companies in this business have witnessed a very robust growth in the recent years. In FY11, for example, Muthoot Finance and Manappuram Finance doubled their revenues as well as net profit. The same trend has been witnessed in the first nine months of this fiscal.

According ICRA, a very small proportion of lending happens at the LTV of 60 per cent or lower, indicating that the new directive would seriously hamper the loan volumes. We believe that the competition pressure on the NBFCs would increase as banks and diversified NBFCs are not required to follow the 60 per cent LTV norms. After the high growth in the past, this regulation would now sharply bring down the revenues of the gold NBFCs. It is also expected that the net interest margins and profitability would also fall. Given these probabilities we believe that investors should not buy these stocks.