Gold loan companies: To shine, but not so bright

The gold lending business became attractive for investors a few years ago. Being backed by an asset like gold, the market perceived it to be low on risk. This was a valid argument in the times when gold prices were rising. Last year, gold spiked sharply when analysts started questioning the dollar’s status as the world’s reserve currency. Come 2012, the world looks a much better place and gold prices have seen some correction. The outlook, too, does not seem as bullish as before. Given that the value of the asset against which gold finance companies lend could be at risk, the Reserve Bank of India (RBI) has stepped in. Its recent norms stipulate that non-banking finance companies (NBFCs) cannot exceed a loan-to-value (LTV) ratio of 60 per cent for loans against gold. Also, they will have to maintain a minimum Tier-I capital of 12 per cent by April 2014. Click here for Cloud Computing Also Read Related Stories News Now - Gold bet turns sour for PE firms - Gold loan companies' shares crash on RBI's public deposit move - Q&A: M G George Muthoot, Muthoot Finance - Gold loan companies' credit quality to remain stable: Crisil - Loan against gold: Banks a better option - At 9.3 mn, a third of MFI borrowers are defaulters A day after RBI’s notification, shares of Manappuram Finance and Muthoot Finance fell 19 per cent and 10 per cent, respectively. Explains Anand Shanbhag, head of research at Avendus Securities: “While the stipulation on capital adequacy ratio is not worrisome, next year’s earnings estimates would be revised. Growth will be impacted and that would be visible over the next few quarters. However, the survival of these companies is not at risk and the impact of this event may not get extended.”