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Exposure limits of banks in gold loan NBFCs cut

To hit new & smaller firms in segment, at the expense of majors latest in central bank?s tightening of leeway for these firms

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The Reserve Bank of India (RBI) on Tuesday mandated to reduce exposure in any single non-banking finance company (NBFC) engaged in the business to 7.5 per cent from the existing 10 per cent of their capital funds. This means banks will have lower funds to lend to these NBFCs, defined as having gold loans to the extent of half or more of their total financial assets.

"However, exposure ceiling may go up by to 12.5 per cent of bank’s if the additional exposure is on account of funds on-lent by to the infrastructure sector. Banks should have an internal sub-limit on their aggregate exposure to all such NBFCs,” RBI said.The central bank has constituted a group under its Adviser-In-Charge of Department of Economic and Policy Research to study different aspects of the sector and the nature of the business.

The regulation is set to impact the borrowing cost of these NBFCs, which accounts for 35 per cent of the Rs 85,000-crore gold loan market in India, as access to bank funding will be limited further. However, the leading companies such as Muthoot Finance and Manappuram Finance said the impact would be minimal, as the present exposure by banks was already within the prescribed limits.

Rs 85,000 crore 
gold loan market in India
of the market accounted for by NBFCs
is set to impact the borrowing cost of these NBFCs 
exposure in a single NBFC is the reduced limit by RBI
was the exposure of banks' capital funds as of now
exposure ceiling might be seen
growth registered by NBFCs engaged in gold loan business in the last two years
growth registered by banks that are involved in gold loan business

“This would help the largest players like us in this segment to get funds from banks, as we enjoy the best credit rating in the sector. This may act as a hindrance for new entrants with small size portfolio to raise funds from banks. Having said that, this may marginally affect the credit flow from banks to gold loan companies in the immediate term,” said Muthoot’s chief financial officer, Oommen K Mammen

Muthoot alone accounts for 19.5 per cent of the gold loan market and is the largest gold loan provider in the country.

“The RBI announcement will mean the incremental flow of funds to gold lending NBFCs will be impacted. However, the impact would be minimal, as we have a fair spread of sources of funds. Currently, our credit lines with banks is at Rs 8,000 crore. Besides, we don’t see the growth forecast for the company to change post the RBI move and we expect to grow by 20-25 per cent,” said I Unnikrishnan, managing director of Manappuram Finance.

Muthoot’s shares on Tuesday closed two per cent higher at Rs 133.35, compared to its previous close at the Bombay Stock Exchange. Manappuram’s tanked 6.2 per cent at Rs 31.9.

Over the past two years on a year-on-year basis, NBFCs engaged in the gold loan business had grown their books by a little more than 50 per cent compared to banks, which registered growth of 32-37 per cent. Concerned, RBI had brought in a slew of measures to tighten regulatory supervision in the sector.

Accordingly, last month, the central bank issued a notification directing all gold loan NBFCs to maintain a loan to value (LTV) ratio of 60 per cent, meaning a borrower has to pledge gold jewellery worth Rs 100 to get a loan of Rs 60. Earlier, in February last year, RBI had removed priority sector status from gold loan companies, which led to higher cost of borrowings for those companies.

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