All that glitters is gold for private equity investors

Rao committee's proposal to raise loan-to-value ratio triggers rally in share prices of gold loan companies

Private equity (PE) investors with large exposure in the gold loan business in India can heave a sigh of relief, as the share prices of portfolio companies — Manappuram Finance and Muthoot Finance — have been soaring new heights.

Share prices have touched the upper circuit following a 20 per cent rise on the Bombay Stock Exchange last week after the Reserve Bank of India (RBI) issued a draft report which proposes to raise the cap on the loan-to-value (LTV) ratio of gold loans for non-banking finance companies (NBFCs) to 75 per cent. The K U B Rao committee, appointed by RBI on gold loan companies, released the draft on January 2. Last year, shares of Manappuram and Muthoot had tanked 20-25 per cent after RBI had restricted the loan offer to 60 per cent of the value of jewellery pledged as collateral.

Baring Private Equity Partners India holds six per cent in Manappuram Finance and three per cent in Muthoot Finance, while Matrix Partners holds 2.11 per cent stake in Muthoot Finance.

Rahul Bhasin, managing partner, Baring PE Partners, said: “Though RBI makes unnecessary interventions into gold loan NBFCs, these stocks remain bullish.” Making a disparity among gold loan NBFCs and banks over LTV and interest rates will never help the interest of society, he added.

A report from Emkay Global said: “The working committee justifies the restriction put on NBFCs and is not in favour of giving a level-playing field to gold loan NBFC with respect to banks, as it believes the gold loan proportion in banks book at one per cent is too low and hence banks can be given freedom to decide their own rates and LTV.” Last week, Manappuram Finance surged 19.97 per cent to touch the upper circuit of Rs 40.55, while Muthoot Finance zoomed 17.87 per cent and finally closed at Rs 230, up 10.21 per cent on the BSE.

“Due to the current regulatory hurdles, chances of new players to enter the space is rare, which will help the existing players continue to make attractive returns,” said Rajeev Suneja of Ernst & Young. Putting a cap on LTV is a right decision in the long run as far as risk is concerned, he added.

Though the draft report by the Rao committee recognised the importance of gold loan finance companies in society, it is not happy with the high interest rate and high-paced growth of such companies. It wants gold loan companies to grow at much slower, sustainable levels and with lower interest rates, the Emkay Global report said.