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    Default Gold lenders lose shine on RBI curbs

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    Gold loan firms were hit badly after the Reserve Bank of India (RBI) curbed mindless lending by non-banking finance companies (NBFCs) against gold.

    Muthoot Finance shares dipped to all-time low of Rs 130.30 in early trade.

    But the stock improved a bit to close with a loss of 9.89 per cent at Rs 146.65. Similarly, another gold loan firm Manappuram Finance fell 18.54 per cent to close at Rs 36.90. Its stock touched its 52- week low of Rs 36.70 during intra-day trade as selling pressure mounted at its counter.

    According to the revised guidelines, gold loan companies have been barred from lending against gold bars, coins and bullion; they can now only lend against gold jewellery.

    RBI has also put a cap on the loan-to-value (LTV) asset ratio allowing gold loan firms to lend a maximum of 60 per cent of the value of the asset. This has been done to protect interests of millions of investors in gold loan firms and ensure that the banking system's advance to NBFCs does not turn into non-performing assets (NPA).

    NBFCs have been also directed to maintain a minimum Tier 1 capital of 12 per cent for safety of investors.

    There are strong indications that gold prices may fall. In such a scenario, gold loan companies could suffer enormous losses as a bulk of customers could be tempted to service the *****.

    Muthoot Finance chairman George Alexander Muthoot told Mail Today his firm is conforming to the RBI norms. "We welcome RBI's guidelines. RBI could have declared a higher ceiling but the move is in the right direction. A lot of new players have entered the market recently and I think that RBI is planning to introduce discipline in the system, which is good for all stakeholders," he said.

    Muthoot Finance is maintaining a Tier 1 capital of 13.37 per cent against RBI's 12 per cent requirement, he added. "The amended guidelines provide time till April 1, 2014, and we have enough headroom. We provide finance against security of household jewellery and our loan-to-value is below 60 per cent."

    "At present, our Gold Loan Assets Under Management is about Rs 24,000 crore and the value of jewellery with the firm is more than Rs 40,000 crore. As a matter of abundant caution, we had been reducing our lending rate per gramme as a risk-management measure due to the volatility in gold prices," he added.

    Since last year, gold loan firms have been lending as the prices of the yellow metal has skyrocketed to all-time high of over Rs 29,500 per 10 grammes.

    Commercial banks have crores of exposure to gold loan companies and besides, NBFCs have raised money from the public through non-convertible debentures. Muthoot Finance, for example, has borrowed Rs 10,000 crore from banks to lend against gold.



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