Gold loan firms diversify to reduce risks

Tags: News
After the Reserve Bank of India (RBI) raised concerns over concentration risk, gold loan NBFCs have begun to diversify their portfolios and resource mobilisation to widen the borrower and investor bases.

Mannapuram Finance is getting into low-cost housing and secured small and medium enterprises. The company is in talks with a housing finance company to start the business, according to company officials.

The company is also raising funds from retail investors through non-convertible debentures to diversify its resource base. Bank lending to gold NBFCs is restricted.

Mannapuram Finance plans to raise Rs 200 crore in NCDs of tenures varying from 400 days to 70 months. Its rival, the Muthoot group, is expected to hit the market with a Rs 500 crore NCD issue for retail investors.

V P Nandakumar, executive chairman of Mannappuram Finance, said, “We are diversifying our portfolio to meet the regulator’s demands of preventing a concentration risk. We are also diversifying the funding resources, which is why we are raising NCDs for Rs 100 crore with a green-shoe option of Rs 100 crore. The money will be used as working capital. We are hitting the market after 18 months.”

The Mannapuram NCD issue will have tenure of 400 days to 70 months, with a coupon rate of 11.50 per cent for 24 months, 12.25 for 36 months; the effective yield will be 12.13 per cent and 12.94 per cent, respectively. The money is expected to double in 70 months.

Muthoot Fincorp, part of Muthoot Pappachan, is getting into microfinance. The company has already bought out an NBFC and is in the process of converting it into a microfinance company.

The company has a low-cost housing loan company, called Muthoot Housing Finance. For two-wheeler loans, it has Muthoot Capital. Muthoot Fincorp is a gold loan company.

Thomas George Muthoot, director of Muthoot Fincorp, said, “We have filed for regulatory approval with RBI to convert the NBFC into a microfinance company.”

The growth of the gold loan NBFC sector is constrained by two stipulations in the new RBI guidelines issued on September 16.

One is that NBFCs take the regulator’s approval before opening new branches, and the other they disburse loans above Rs 1 lakh through cheques.

Mannapuram Finance has 3,295 branches, 1.5 million customers and 51 tonnes of gold holdings. Muthoot Fincorp has close to 4,000 branches and a customer base of 10 million.

RBI reduced the loan-to-value ratio (LTV) to 60 per cent to restrict NBFC lending against gold after the central bank saw a ‘concentration risk’. RBI feared that systemic instabilities could potentially arise on account of the concentration risk.

Further, banks were asked to reduce their exposure ceiling in a single NBFC with gold loans of at least 50 per cent of its total financial assets. The ceiling was to be lowered from 10 per cent to 7.5 per cent of a bank’s capital funds.

In the September 16 circular, RBI said to standardise valuation and make it more transparent to the borrower, gold jewellery accepted as collateral would have to be valued at the average of the closing price of 22 carat gold in the preceding 30 days as quoted by the Bombay Bullion Association.

Also, while accepting gold as collateral, an NBFC should give the borrower the purity and weight of the gold in writing on its letterhead. In case of gold of purity less than 22 carats, the NBFC should translate the collateral into 22 carat and state the exact weight in grammes of the collateral. In other words, jewellery of lower purity must be valued proportionately.

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