MUMBAI: The Reserve Bank of India’s (RBI) decision to exclude gold loans that are originated by non-banking financial companies (NBFCs) and acquired by banks from being classified as priority sector lending is expected to dent the growth of gold loan companies and increase their cost of funds.
Shares of Muthoot Finance, Mannapuran Finance and IIFL Finance declined by up to 2.5% on Tuesday, after the RBI issued revised priority sector lending guidelines on Monday night.
“Loans against gold jewellery acquired by banks from NBFCs are not eligible for priority sector status,” noted the master circular. “Investment by banks in securitisation notes with loans against gold jewellery originated by NBFCs as underlying are not eligible for the priority sector status,” the circular said.
Shares of IIFL Finance ended down 2.5% to Rs 328, Manappuram Finance fell 1.3% to Rs 237 and Muthoot Finance shares dropped 0.3% to Rs 2,346 on the BSE.
NBFCs have a competitive edge in gold loan origination due to their streamlined process, quick turnaround times and widespread presence in rural and semi-urban areas – regions where priority sector borrowers are concentrated. Banks, with stricter norms and slower process, find it challenging to directly reach these customers.
“It is a fairy common practice among NBFCs to sell priority sector qualified gold loans to banks which allowed funding at a concessional rate. With the new guidelines taking away priority sector benefits, the cost advantage will go away as there will be no additional incentives for banks,” said Prakash Agarwal, partner, Gefion Capital, a capital advisory firm. “Changes in norms will also increase cost of funds for NBFCs, especially ones having higher dependence on this funding. Revised norms may even curtail funding availability for a few.”
Loans against gold, particularly those given to farmers and small enterprises, qualify as priority sector lending under the agriculture and micro-enterprise categories.
“NBFCs specialising in gold loans have deep penetration in rural and semi-urban markets. By purchasing gold loan portfolios from NBFCs, banks can indirectly expand their rural reach without having to build an extensive branch network,” said an official of a private bank.
Source: The Financial Express
Government Open To Reducing Tariffs On 55 Per Cent Of US Imports 