The Telegraph
Friday , January 4 , 2013
Since 1st March, 1999
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Gold loan firms shine

Mumbai, Jan 3: Shares of gold loan companies glittered on the stock exchanges today after a panel appointed by the Reserve Bank of India (RBI) lent an air of legitimacy to their operations by saying that they do not pose any systemic risk to the financial system.

On the BSE while the Manappuram Finance scrip soared nearly 20 per cent, or Rs 6.75, to Rs 40.55, while Muthoot Finance rallied more than 10 per cent to close at Rs 230.

These non-banking finance companies (NBFCs) have been under performing the stock markets in recent months as the central bank had introduced several steps in the past to check the surge in gold loans.

However, market circles said that investors were encouraged by the comments of the KUB Rao committee, which acknowledged the positive role of banks and non-banking financial companies (NBFCs) in monetising gold.

The report also said that gold loan NBFCs did not present any systemic risk to the banking risk, which analysts feel will ease funding constraints to this sector from commercial banks.

Rating agency Icra said in a report that the acceptance of “gold loan product” by the committee (and possibly by the RBI) and the proposed steps to enhance discipline and transparency could improve the confidence of institutional investors in gold loan companies. This, in turn, could help them mobilise institutional funds that were in tight supply since March last year.

Significantly, the committee also recommended that the loan-to-value (LTV) of this sector be raised to 75 per cent from 60 per cent. This means for gold worth Rs 100 offered as collateral, the NBFC can give loan up to Rs 75.

Vibha Batra, Karthik Srinivasan, and Jaskirat S. Chadha of Icra added that while standardisation of gold valuation at the current 60 per cent loan-to-value may have constrained the growth of NBFCs, the proposal by the committee to raise the LTV ceiling to 75 per cent could give GLCs flexibility to grow their business at a reasonable pace.

However, the committee has recommended rationalisation of interest rates charged by NBFCs by linking the same to the maximum advance rate of the State Bank of India.

Although it has not clarified what the spread over the SBI’s maximum advance rate should be, or what should be taken as SBI’s maximum advance rate, the report added that capping of interest rate without reference to the borrowing costs of the underlying NBFC would be a negative.