Gold loan stocks jump on panel proposals; Manappuram up 17%

Shares of Manappuram Financing and Muthoot Financing were up sharply on Rao panel’s proposal that gold loan firms be allowed to lend 75 percent against the value of gold pledged, against 60 percent as is the norm now. Manappuram Finance shares were up 17 per cent to Rs 39.50, and Muthoot Finance shares were 11 percent to Rs 232 up.

Brokerages tracking these shares had cited clearness on rules for the sector among the triggersfor re-ranking of the stocks.

Both shares had underperformed the broader marketplace in 2012 by an enormous margin. Manappuram shares declined 24 percent and Muthoot Financing rose 8 percent barely.

Gold loan businesses benefit from a higher loan-to-value ratio, as they charge very high rates of interest (anywhere between 18-24 percent depending on the value of gold pledged). Last year in March, the RBI had capped the LTV at 60 percent to curb the rapid growth of gold loans, that your central bank felt posed hazards to the operational system. That sparked a sell-off in gold mortgage firms. The central bank had proposed capping the rates of interest charged by gold loan companies also.

The Rao panel, nevertheless, hasn’t suggested lots to the maximum interest that can be charged by gold loan firms.

Likely cap on interest rates is the other main cause of worry for investors in shares of gold loan companies. The onus has been put by the Rao panel of fixing the limit on the RBI.

“Some NBFCs do holiday resort to unethical procedures in charging high interest levels. Therefore, there are enough grounds to rationalise the interest structure like the penalty for default in repayment,” the Rao panel record said.

“It may be prescribed that the gold loans NBFCs may adopt an interest rate linked to a bench mark rate like bank rate or State Bank of India’s maximum advance rate,” the report said.

At the same time, the panel has said that unbridled growth of branches by large gold loan NBFCs must be moderated as much branches lacked basic amenities and posed a risk to the gold pledged generally there.

“There is apparently a justification for imposing the necessity of an approval for the brand new of branches an NBFC, which includes expanded beyond say 1000 branches already, they are able to open in a year,” the report said.

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The panel has recommended that gold loan companies shore up their capital adequacy ratio by infusing their own funds. It has also called for tighter rules to deter retail investors from subscribing to non-convertible debenture (NCD) issues of gold loan firms.

In addition, gold loan companies shall have to communicate the conditions of their loans more transparently.

“The widely prevalent practice of issuing a little pawn ticket must be replaced with proper loan contract indicating all of the applicable conditions and levies and penal interest charges transparently,” the report said.

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