Reduce dependence on banks, panel to gold loan firms

The growing interconnection between banks and gold loan companies with respect to the former’s exposure to the latter is a concern and gold loan firms should look for diversifying their source of funds, the K U B Rao panel, appointed by the Reserve Bank of India (RBI) to study issues relating to gold import and gold loan non-banking financial companies (NBFCs), said on Wednesday.

The committee has recommended a slew of measures for regulating NBFCs, and has suggested RBI review the loan-to-value (LTV) cap of 60 per cent, which had hit the profitability of these companies hard in the first two quarters of this financial year. The consistent increase in the dependence of the gold loan NBFCs on the banking sector raises concerns and the companies should gradually reduce their dependence on bank finance, the committee said.

The Association of Gold Loan Companies had sought permission to access additional funding via external commercial borrowings, securitisation and foreign institutional investors. The regulator may examine this, the Rao panel said.

The working group also suggested improving capital adequacy for these companies as it was continuously on decline under the period of study. It, however, said it doesn’t suggest any increase in the already applicable capital adequacy norms which RBI may review time to time.

The committee said retail non-convertible debentures raised by private placements amount to surrogate deposits, and RBI should push for a change in laws to tighten the loopholes in this regard.

The panel also favoured the idea of withdrawing exemptions available to subordinated debt from deposits, as the retail subscribers were not aware of the features and implications of subscribing to such instruments.

This was tantamount to accepting deposits in non-deposit taking company. Setting rules in this regard would deter companies from camouflaging such instruments as deposits, it said. Other norms suggested were setting up an ombudsman-like scheme and rationalisation of interest rates for the gold loan companies.

Industry players welcomed the report’s suggestions. I Unnikrishnan, managing director, Manappuram Finance, said, “In the short term, the new norms may be challenging. But in the long term, these will improve the industry.”

A suggestion that was not the part of draft report was that NBFCs avoid enticing advertisements claiming gold loan in five minutes. The process takes longer and such ads were not in consumers’ best interests, it was said. The working group has also flagged the issue of not adhering to know-your-customer norms.