Faced with the recent guidelines skewed in favour of nationalised banks, private gold loan companies (non-banking financial companies or NBFCs) have urged the Reserve Bank of India (RBI) to provide a level playing field.
Through the Association of Gold Loan Companies (AGLC), headed by George Alexander Muthoot, managing director of Muthoot Finance, NBFCs have submitted a representation to RBI to reconsider its recent decision with regard to loan-to-value (LTV) and lending against gold coins.
The RBI guidelines issued last month debar private gold companies, including Muthoot Finance and Manappuram Finance, from lending against gold coins, while no such restrictions were imposed on banks. The guidelines also restrict private lending companies to surpass LTV over 60 per cent. Banks, however, were allowed to lend up to their own comfort level with customers, which may be as high as 85 per cent.
RBI’s directives are expected to bring in more credibility to the briskly growing sector, apart from creating high entry barriers for companies looking to ride the phase. Also, these would favour banks and smaller companies, especially those with gold loan assets less than 50 per cent of their total financial assets.
“This regulation has left more room for smaller companies operating in the space of gold loans and banks to fund the purchasing of gold coins,” said Muthoot.
With an estimated Rs 24,000 crore of loan book value, Muthoot Finance has been maintaining 60 per cent of LTV. The company has around 2.5 per cent of lending against gold coins. Manappuram, however, has LTV of about 65 per cent. However, with proposed lower LTV to new customers, the company plans to bring it down to 60 per cent. Of the total Rs 13,000 crore of loan book value, the company has minimal exposure against gold coins.
A Manappuram Finance spokesperson said, “Gold loans are typically given against household-used jewellery. In the past, we have extended finance against gold coins, but this was on a restricted scale and the volumes were insignificant. We have not lent against bullion/ primary gold.”
Recent growth achieved by Manappuram Finance and its peers have come from two major sources, he added. First, customers attracted or weaned away from the unorganised sector. This class is drawn to gold loan NBFCs by the comparatively lower pricing along with higher levels of transparency and credibility and good service. However, a part of the attraction was they did not have to lose on LTV on their limited holding of gold. Consequently, this class of customers presents a greater challenge. While the decrease in interest rates (on account of lower LTV) would be a bonus to them, it is possible some of the more
The other category was customers attracted from a class of better-off gold owners who earlier, would not have thought of pawning gold. This class puts a premium on time and convenience, and therefore, is likely to be put off by cumbersome procedural formalities at the commercial banks.