Shares of gold loan companies in demand

Shares of two gold financing firms spurted 20% each at 9:57 IST on BSE after the central bank allowed non-banking finance companies to lend up to 75% of the value of gold from 60% at present.

Muthoot Finance (20%) and Manappuram Finance (20%), edged higher.

The S&P BSE Sensex was down 17.35 points, or 0.08% at 20,712.03.

The Reserve Bank of India (RBI) on Wednesday, 8 January 2013, allowed non-banking finance companies (NBFCs), especially gold loan companies, to give higher amount of loan against gold jewellery pledged by borrowers.

NBFCs can now give up to 75%, up from 60% now, of the value of the gold jewellery pledged as loan.

The RBI further said the value of the jewellery for the purpose of determining the maximum permissible loan amount will be only the intrinsic value of the gold content therein and no other cost elements (like making charges) should be added thereto.

The intrinsic value is arrived in a particular way suggested by the RBI.

NBFCs had raised apprehensions on certifying the purity of the gold jewellery accepted as collateral on grounds that under the current practices it was possible only to arrive at the proximate purity of the gold and that such a certification could lead to dispute with the borrowers.

RBI, however, clarified that the need to give a certificate on the purity of gold cannot be dispensed with.

The certified purity should be applied for determining the maximum permissible loan and the reserve price for auction, it said, adding the NBFCs can, however, include suitable caveats to protect themselves against disputes on redemption.

It is also clarified that the ownership verification need not necessarily be through original receipts for the jewellery pledged but a suitable document may be prepared to explain how the ownership was determined, particularly in each and every case where the gold jewellery pledged by a borrower at any one time or cumulatively on loan outstanding is more than 20 grams. NBFCs shall have an explicit policy in this regard as approved by the board in their overall loan policy, RBI said in a statement.

The KUB Rao Working Group had recommended that the Loan-To-Value (LTV) ratio may be increased from 60% to 75% once the business levels of the gold loan NBFCs come to a level considered appropriate.

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