Non-banking finance companies (NBFCs) engaged in gold loan business may overhaul their business models, especially the fund-raising pattern. This follows a Reserve Bank of India (RBI) directive that says bank credit to NBFCs for giving loans against gold jewellery will not be treated as exposure to the agricultural sector.
As regular loans are costlier than priority sector ones, the regulation is set to affect the borrowing cost of these NBFCs, which account for more than 32 per cent of the Rs 80,000-crore gold loan market.
“Under the base rate regime, the borrowing cost differential between regular and agriculture loans (priority sector loans) is 100-200 basis points. For us, the incremental borrowing cost could go up by 50-100 basis points,” said an official at Muthoot Finance, the largest gold loan provider in the country. The company alone accounts for 19.5 per cent of the gold loan market.
According to analysts, the incremental funding cost for the sector might rise by 100-200 basis points, impacting nearly 50 per cent of their borrowings and also limiting the attractiveness of securitisation due to lower spreads.
Admitting a prospective rise in the cost of funds for NBFCs engaged in gold business, V P Nandakumar, chairman, Manapuram Finance, said, “The interest rates banks charge us may increase by 100 basis points. NBFCs would increase market borrowings (commercial paper) in future.
Since these loans (loans against gold jewellery) would no longer enjoy priority-sector status, the pace of securitisation or assignment to other banks would also decline. Hence, their share in the total loan book would decline, Nandakumar said.
Gold loans account for more than 95 per cent of Manapuram’s total advances of Rs 5,500 crore, whereas 99 per cent of its interest income comes from the sector.
According to data from Icra Management Consulting Services, public sector banks have 46.5 per cent share in the gold loan market, whereas its private sector peers account for 11.6 per cent.
Private sector banks may face adverse impact of RBI’s decision. An NBFC executive said private sector banks which gave credit to NBFCs in gold business would not be able to treat them as agriculture loans to meet priority-sector targets. As a consequence, some of them might fall short of their PSL target.
Till December 31, NBFCs in the sector grew their books by 72 per cent compared to banks, which registered growth of 32-37 per cent on-year.
“The main reason behind higher growth for NBFCs has been the higher loan-to-value ratio, ensuring maximum value of loan in return for gold, lesser documentation and faster loan disbursal mechanism,” said an industry analyst.
“The loan-to-value ratio for a 22 carat jewellery piece typically varies from 55 per cent to 65 per cent for banks while it varies from 70 per cent to 80 per cent for NBFCs. Interest rates charged by banks and NBFCs also differ,” said an official at Muthoot Finance.
Gold loan business of NBFCs has expanded substantially in large cities. Such loans were being passed off as agricultural loans when banks took exposure to (invested in) securitised paper.