Gold loan companies & banks unfazed by new RBI measures

Even as RBI tightens the screws on gold loans in India, banks and mutual fund houses shrug off the new curbs, insisting only minimal impact.

Posted: Wednesday , 29 May 2013

MUMBAI (MINEWEB) -

A day old move by India's apex bank placing restrictions in terms of lending on gold has been shrugged off by both banks and non banking finance companies, who have been brought under the regulator's scanner yet again. The new measure has not rattled the industry, despite shares of gold loan companies sliding by 3% on the bourses. Could this mean that India's RBI is slipping?

Amidst a steep fall in gold prices, the Reserve Bank of India on May 27 further tightened the screws on banks and non banking finance firms restricting them from allocating loans against units of gold exchange traded funds (ETFs) and gold mutual funds.

The Reserve Bank of India (RBI) has said that in order to curb the demand for gold, both banks and non banking finance companies (NBFCs) would not be allowed to extend loans. However, banks and mutual fund houses have shrugged off the new curbs, insisting impact would be minimal.

This is the third in series of curbs this month by the RBI with regards to gold. Earlier, the apex bank had restricted bullion imports by banks, which traders say is aimed at cutting shipments into the country by at least 10%. Gold imports were 1,015 tonnes in 2012-13.

The RBI has also asked banks to ensure the weight of any specially minted gold coins do not exceed 50 gram per customer. The regulator has held that, in a bid to ensure genuine investment demand, it did not intend to ban banks from selling gold coins, but was intent on discouraging speculative investments in gold.

Though most bankers agreed the move is aimed at curbing rising demand for the precious metal, mutual fund houses said lending against gold ETFs has not gained widespread appeal in the country. Sundeep Sikka, chief executive, Reliance Capital Asset Management, said with retail investors being the majority of investors coming into these funds, they have not been keen to leverage the product.

Gold ETFs had assets under management of $2.0 billion (Rs 116 billion) at the end of the March quarter, according to data from the Association of Mutual Funds in India.

Though companies accounted for the bulk of the assets at $1.1 billion (Rs 63 billion), retail investors were second with $555 million (Rs 31 billion). Data showed that banks, foreign institutional investors and wealthy individuals accounted for the remaining amount.

A senior official from the Central Bank of India said that advances against gold ETFs and mutual funds in the retail segment are practically negligible. In the institutional segment, too, there are no big advances, he added.

Though the RBI has said that no advances be given by NBFCs against bullion or primary gold and gold coins, it had also said NBFCs should not grant advances for the purchase of gold in any form.

However, the Association of Gold Loan Companies has practically dismissed the curbs, insisting members would not be affected by it. The President of the association, George Alexander Muthoot, who is also the owner of the largest NBFC said, ``We would like to inform all our stakeholders that gold loan NBFCs lend against household-used jewellery only and no advances have been granted against gold coins, bullion or gold bars.''

As if to get the powers-at-be at the RBI to understand the basic difference in their lending policy, and as if to cock-a-snook at the new curbs, Muthoot also reiterated that the RBI could have given a level playing field to NBFCs on par with banks, by allowing NBFCs the freedom to lend against gold coins.

The RBI had noted that while there may not be any objection to the granting of advances against specially minted gold coins sold by banks, there is a risk that some of these will weigh much more, thereby circumventing the RBI's guidelines regarding restrictions on grant of advance against gold bullion. NBFCs have been kept out of the gold coin loan business altogether.

On May 29, shares of two gold loan companies Muthoot Finance and Manappuram Finance took a hit on the bourses. While Muthoot lost 2.01%, the Manappuram stock was down 3%.

The Indian government has taken several steps recently, including raising import duty, to curb the inbound shipments of gold. Gold imports jumped by 138% to $7.5 billion in April, the highest so far this year, pushing up India's trade deficit to $17.7 billion.