High loan-to-value for gold loan NBFCs cheers investors

However, analysts fear stress in asset quality

The Reserve Bank of India (RBI)'s decision to increase the loan-to-value (LTV) ratio of gold loan companies have impressed the investor community, but analysts remain cautious on the sector, on concerns of import duty roll back and asset quality stress.

"Price differential between the domestic and international markets increased to 17 per cent from two per cent at the beginning of 2013. With the current account deficit under control, talks are on to roll back the duty increase. Correction in domestic gold prices led by any import duty roll back would completely negate the benefits from relaxation in LTV cap...Continue to remain cautious on gold loan NBFCs (non-banking financial companies)," Pradeep Agrawal, research analyst with Emkay Global Financial Services, said in a note.

He also warned high LTV in a falling price scenario could accentuate asset quality stress.

However, investors do not appear concerned. The shares of Muthoot Finance and Manappuram Finance gained 20 per cent each on Thursday's trade. On Wednesday, RBI had said it would allow gold loan companies to lend money up to 75 per cent of the value of gold jewellery pledged as collateral. The move is expected to aid gold loan NBFCs in expanding their loan portfolios and improving their market share.

"RBI announcement is a positive step for the gold loan sector. It reflects increased level of confidence of RBI in the sector. Many customers had moved to the unorganised sector because of lower LTV and they are expected to come back to the organised sector. We will be working with RBI in ensuring implementation of better governance and practices," said George Alexander Muthoot, MD, Muthoot Finance. The firm said it expected its assets under management to improve after the LTV revision. So do others in the sector.

"A higher LTV ratio will allow us to lend more money against pledged gold jewellery. This will benefit the customers and the sector," said I Unnikrishnan, executive director and deputy chief executive at Manappuram Finance.

But analysts remain unconvinced. While admitting relaxation in some of the rules was necessary for the growth of the gold loan sector, Vibha Batra, senior vice-president, financial sector, at Icra, said: "The changes in rules also come with challenges. Following the rise in LTV ceiling, the equity of customers will now be low. Gold loan companies will be exposed to more risks from fluctuations in value of gold prices."