The gold loan business had been performing steadily and grown with a very fast pace in last few years. The current situation has changed a lot, and now it is a dying business for NBFC whereas banks have taken advantage of this situation. Suddenly, a break has been put on by the RBI on NBFC’s gold loan business by setting in place a set of rules to curb the risk and gain control over the market. Recently, RBI has shown deep concern on the operational model of NBFC’s gold loan business.
What’s happening in gold financing market?
The cap of 60% loan by an NBFC against the total value of gold has hampered the volume significantly. Most of the gold financing companies (GFC) have already revised the growth target to be flat for this year. The RBI’s notice to arrange extra capital requirement for the NBFC from 10% (current) to 12% by 2014 would also bring strain on the working with these companies. Companies like Muthoot finance, Mannapuram gold and Shriram city union finance Ltd have decided either to halt the expansion plan or to cut the growth target drastically. NBFC is also closing down non-viable branches in many cities to overcome the setback. A loan on primary gold and gold coins has been also restricted by RBI.
GFCs in Bad Phase
The loss of NBFC would definitely provide an edge to the banks to grow gold loan business. Recently, RBI denied the request by NBFCs to frame similar regulation for the bank’s gold loan activity. It only shows RBI’s concern over NBFC ‘s capacity to handle the business and competence to fight an adverse situation. Gold is one of the most powerful investment assets in India, and its huge import volume has strained INR value over other foreign currencies in recent times. To bring out the gold deposited in home and lockers to market, RBI needs a stronger and reliable channel like banks, which are well regulated and controlled under its aegis. To confirm its stand and denying NBFC like regulation for the banks RBI had said that “They can’t be compared with the banks, even those that extend jewelry loans, as this may be a minuscule portion of the balance sheet, and all banks are diversified entities.” With RBI constituting a separate committee to study GFC’s role in rising gold imports, lending practices, borrowing profile, further regulatory tightening cannot be overlooked.
Can GFC Fight Back?
The restrictions and change in rule can have severe effect on the NBFC’s business in short term, but at the same time it has given time to come up with an even better product offering in the future. NBFC has a niche market segment, and its reach would provide an advantage over the banks for some years but to sustain longer in this market the gold financing companies have to play a bigger role by coming out with more products to diversify the risk and better competence against banks. The chances of joining hands to fight the situation are quite probable in this situation and such step would give an advantage to the GFCs in terms of size, power and presence. If no strategic decision is taken during this stage, then GFC’s market share will further drop in coming days. In this situation if any new regulation is introduced by the RBI, then it will snatch their business model and promote banks to get an invincible leading position.
Strict control on Gold Loan companies are must , otherwise country has to pay heavily .!st,these NBFCs are simply negating the effect of RBI monetary policy by creating loan on which there is no control by RBI.2ndly,heavy profit arising out of this business due to low NPA & high interest rate gets diverted to other activities by promoters.One such case is Manappuram where its CMD had diverted huge funds to his proprietory business in realty & hospitality.If Manappuram gets sick,he may simply walk out.Then there is high interest charges .In its eagerness to earn more, such companies frequently are led into lending against spurious gold.Unearthing of more than Rs.3.00 cr. loan against fake gold has rattled Manappuram very seriously.Imagine what happens to public & RBI when such co. goes bust !