MUMBAI: The Reserve Bank of India on Wednesday tightened rules for lending against gold by finance companies, saying the rapid growth in such loans in the past few years had increased risks to the banking system and retail investors.
The banking regulator has directed that companies having half their assets in gold should have a minimum equity capital, or tier-I capital, of 12% by April 2014. Further, these companies can’t lend more than 60% of the value of gold jewellery.
NBFCs lending against gold have seen almost 50% annual growth in the past few years as rising prices of the yellow metal led many people without access to banks to borrow from these companies.
Since business was booming, companies such as Muthoot Finance and Manappuram Finance began borrowing substantially from banks and also through sale of bonds. The RBI is worried that since these companies lend 70-75% of the value of gold, a fall in prices could destabilise the system.
The central bank has also banned companies from lending against bullion, primary gold and gold coins, leaving just jewellery.
“The rapid pace of their growth and the nature of their business model, which has inherent concentration risk”, exposes them to “adverse movement of gold prices”, warned the RBI.
More than half the funding requirements of these finance companies are met through borrowings from banks and from sale of bonds. With high profit margins, investors have been lapping up bonds and stocks of gold loan companies.