Wednesday, September 18, 2013

Reserve Bank tightens rules for lending on gold
[Editor: If the RBI has brought in new changes in the lending policies of gold by the NBFCs, then it should be positive for the shareholders, as it will reduce defaults (delinquencies), especially when such clause, as, "average closing price of 22-carat gold for the preceding 30 days" has been introduced. Moreover, we have recently seen that there were some loot of Gold from one of the branches of Manappuram Finance Ltd, hence it is equally important, for any gold loan company to have adequate storage facility for the yellow metal; to guard against any mishap. So, Reserve Bank of India is actually protecting the shareholders, from any unfortunate event. This kind of policy is pragmatic and is the need of the hour. 
Moreover, it should be understood that Gold Loan companies do not normally sell gold, but they give loans based on the LTV of Gold, which is still now at 60%. Since the price of gold is not expected to fluctuate by 60% in 30 days, it is a win-win situation for the shareholders. This will also check, unnecessary, risk-taking by Gold loans companies, in order to increase its business. Therefore, to say the least all these measures by the RBI should, give more comfort to the Gold Loan companies and help increase shareholders' value. Manappuram Finance Ltd is now trading at Rs.14.75 and Muthoot Finance Ltd at Rs.99.90, both of which are expected to move up from here]
The Reserve Bank of India (RBI) has tightened rules for finance companies which lend against gold in line with the recommendations of an internal panel.

In a notification, the RBI stated that the recommendations of the panel headed by K U B Rao related to NBFCs lending against the collateral of gold jewellery have been broadly accepted by the central bank, which led issuing guidelines now.

Accordingly, the RBI said lenders need to value the pledged gold at the average closing price of 22-carat gold for the preceding 30 days as quoted by the Bombay Bullion Association Ltd, to arrive at the loan-to-value ratio, while the ratio would remain at 60 per cent for loans against jewellery.

"Currently, there is no standard method for arriving at the value of gold accepted as collateral and valuation is arbitrary and opaque," said the notification.

Also, the RBI streamlined the process by which lenders auction gold when a borrower defaults, saying lenders need to declare a reserve price for the pledged ornaments.  Lenders would also need RBI approval to open branches exceeding 1,000 and no new ones would be allowed without adequate storage facility for gold.

As such, some of the existing listed entities like Muthoot Finance and Manappuram Finance having 3,801 and 3,293 branches respectively may be affected by the RBI's notification.  
"Unbridled growth may not be in the overall interests of the concerned NBFC or the sector and there is a need for consolidation of the existing network," the central bank said.

Courtesy: Deccan Herald