Rating agency Crisil has warned that new RBI regulations that limit the amount of money gold-loan companies could provide will reduce the growth rate of the industry from 80% to 20-25% per year.
New regulations from the Reserve Bank of India prohibit companies from loaning more than 60% of the value of the gold that the consumer brings in.
At present, some companies offer as much as 90% of the value of the pawned gold as loan. The average is around 75% of the gold value, Crisil estimated.
RBI also wants gold companies to maintain their capital adequacy ratio at 12 percent. Capital adequacy ratio measures the amount of a bank’s capital, expressed as a percentage of its risk weighted credit exposures.
A higher ratio reduces the leverage that the bank can have over its assets and lowers the funds available for it to disperse as loans.
According to Crisil, the stipulation of the ratio is unlikely to affect Indian gold loan companies, which, in India, include Manappuram Finance Ltd, Muthoot Finance Ltd, Muthoot Fincorp Ltd etc..
However, the stipulation that companies may only extend loans to the extent of 60% of the gold-value will hurt, as many unregistered firms will be able to offer much higher amounts than registered companies.
“The LTV cap is likely to result in significantly lower growth rates, as the borrowers will have to bring in additional jewellery to avail of a loan of the same amount.
“In addition, this development could result in business volumes shifting to the unorganised sector, which will continue to extend loans at higher LTV ratios. The currently high profitability of gold loan companies may also moderate, as these companies are likely to reduce pricing to protect their market shares and prevent a shift to the unorganised segment,” Crisil said.
In the long, Crisil said, the regulations will prove to be a positive for the industry.
Lower LTV ratios will also strengthen the asset quality of gold loan companies, as the ability to absorb volatility in gold prices will now be much higher, it said.
“The regulations protect gold loan companies from the remote possibility of a unidirectional and sudden drop of up to 40 per cent in gold prices over a three- to six-month period, which is the usual tenure of gold loans,” said Nagarajan Narasimhan, Director, CRISIL Ratings.