RBI Imposes Norms on Non-Banking Finance Companies Lending Against Gold

The Reserve Bank of India (RBI) on 21st March, tightened rules for lending against gold by Non-Banking Finance Companies (NBFCs), in order to lower the increased risk to the banking system and also the retail investors. RBI has restricted the loan size to 60 percent of the value (loan-to-value) of gold collateral.

This means if the value of the gold jewellery is Rs.1 lakh, NBFCs can lend loans up to Rs.60,000. Earlier till date, there were no such restrictions on gold loans. Many finance companies extended loans up to 90-95 percent of the value of the gold jewellery.

RBI has directed that finance companies having half of their assets in gold should maintain a minimum tier-I capital, of 12% by April 2014. Since there was a gold loan boom, companies like Manappuram Finance and Muthoot Finance began borrowing substantially from banks and from sale of bonds. This resulted in high profit margins, where investors have been lapping up bonds and stocks of gold loan companies.

With the new tightening norm by RBI, share prices of NBFCs like Muthoot Finance has dipped 20% to Rs.130, its lifetime low value, while Manappuram has dipped 15% to Rs.38.55 on opening trades on the Bombay Stock Exchange (BSE).

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