RBI proposal may boost gold loan companies' growth: ICRA

The central bank has proposed to increase LTV ratio to 75% from the present 60%

The proposal by the Reserve Bank of India (RBI) to increase the loan to value (LTV) ratio to 75% from the present 60% is likely to help gold loan companies increase their business volume at a reasonable rate, says a report by rating agency ICRA.

"Standardisation of valuation of gold and increase in the LTV cap from 60% to 75% would help gold loan companies increase business volume," the report said.

It, however, added that the pace of growth of these companies is likely to be much lower than the over 120% compounded annual growth rate (CAGR) witnessed over the last three years.

The K U B Rao committee, appointed by the RBI on gold loan companies (GLCs) was released on January 2. It has proposed to increase the LTV ratio along with a host of other recommendations for monetisation of gold.

The report also acknowledged the positive role of banks and non-banking financial companies (NBFCs) in monetising gold.

Referring to the report, the agency also said gold loan NBFCs may not increase their market share from the present level as banks enjoy a competitive advantage over them.

"As banks enjoy a competitive advantage over NBFCs, and given the healthy risk-adjusted returns and growth prospects in the gold loan segment, banks could step up the pace of growth of gold loans. Were this to happen, the market share of NBFCs in gold loans may not increase from the current 28% by FY12-end," the report said.

The report also noted that the pace of growth of gold loan companies might slow down as they rely more on wholesale funding sources.

"Significant funding constraints [despite possible easing] may slow down the pace of growth of GLCs, as such entities are highly reliant on wholesale funding sources," the report said.

It, however, pointed out that banks with 72% market share could expand the Rs 1.4 lakh crore gold loan market in the short-term with increase of their market share.