“Instead of three gold chains, a borrower will henceforth have to pledge four to get a loan from us,” said the head of a prominent gold loan company.
This was his reaction to the tightening of lending norms for gold loan companies by the Reserve Bank of India.
The business of non-banking finance companies predominantly lending against gold jewellery could see subdued growth following the regulator's directives, he said.
These companies have seen rapid growth in the last few years.
Further, the robust 9-10 per cent margins that these companies enjoyed could come down by up to 100 basis points.
In a blow to gold loan companies, the RBI, late on Wednesday evening, directed them to not give loans exceeding 60 per cent of the value of gold jewellery. Hitherto, these companies used to give up to 80 per cent of the value of gold as loan.
According to the RBI, NBFCs cannot grant any advance against bullion/primary gold and gold coins.
Further, the gold loan companies have to maintain a minimum Tier-I (core capital) of 12 per cent by April 1, 2014.
Mr George Alexander Muthoot, Managing Director, Muthoot Finance, said the RBI directives could deter new players from entering the sector and borrowers at the bottom of the pyramid would go back to the unorganised sector.
Disbursement volume
Credit rating agency ICRA has estimated that a relatively small proportion of the lending happens at loan-to-value (loan as a percentage of the value of the asset) of 60 per cent or lower, and therefore, the disbursements volumes of gold loan companies are bound to shrink.
Pointing out that there is a lack of clarity on the computation of collateral value, ICRA said if adjustments (after deductions for making charges, precious stones, and so on) are allowed to be grossed up while computing loan eligibility, the impact on disbursement volumes may not be that severe.
Lower LTVs could lower the lending yields of single-line gold loan companies (typically, lending yields decline as LTV drops), thereby impacting their return on equity, as per an analysis by the agency.
Moreover, the pressure on lending yields and disbursement volumes of gold loan companies would also increase because competing banks and diversified NBFCs would not have to follow the 60 per cent LTV norms.
Growth will moderate
Credit rating agency Crisil, in its report said the RBI's recent guidelines for the gold loan sector will significantly moderate the sector's growth and profitability over the next year.
Business growth is likely to fall from 80 per cent per annum to 20-25 per cent per annum and return on assets is expected to fall from the currently high level of 4.5 per cent to 2.5-3.0 per cent, it added.