The growth and profitability of non-banking finance companies specialising in gold loans are expected to take a hit due to regulatory pressure.
The new regulations, in the form of loan-to-value (LTV) cap and funding constraints, will significantly restrict expansion capabilities of these NBFCs, said ICRA Management Consultancy Services (IMaCS).
By the new Reserve Bank of India norms, NBFCs can lend only up to 60 per cent of the value of pledged gold (the LTV ratio is capped at 60 per cent).
Further, for banks, the exposure to a single gold loan NBFC has been reduced to 7.5 per cent from 10 per cent of the banks’ capital funds.
The consulting firm said specialised NBFCs need to gear up to meet the anticipated rise in competitive pressure from banks that have, by regulations, been incentivised for a more direct presence in the gold loan segment.
According to IMaCS, the RBI provides regulatory arbitrage to banks, which have no LTV caps and low capital adequacy requirements vis-à-vis NBFCs operating in the segment. The consulting firm expects the yield on gold loan portfolio of the specialised NBFCs to come down by 80-120 basis points. This combined with pressure on funding costs is expected to translate into a reduction of 70-90 basis points in the return on assets (RoA) of gold loans NBFCs in FY13.
Regulatory impact
“The impact of the regulations is expected to range from moderate to high depending on the counterstrategies adopted by these NBFCs.
“The strategies will include an option of grossing up the collateral value for gold loans, by including the making, polishing and stones/gems charges in the collateral value which is estimated at around 15-20 per cent of the value of jewellery,” said the consulting arm of credit rating agency ICRA.
IMaCs expects the growth in gold loan portfolio of the NBFCs to settle at to 20-22 per cent.
Over the next couple of years, gold loan NBFCs are expected to focus on consolidating their current market position, possibly slow down their expansion drive (yet maintain their first mover advantage in non-South regions), said IMaCS.
These companies are expected to invest in strengthening their credit, operational and governance systems to meet the regulatory requirements.
The organised gold loans sector had grown to Rs 1,15,000-1,25,000 crore in FY12 from Rs 68,000-72,000 crore in FY11.