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Gold loan NBFCs’ growth warrants close monitoring: RBI panel

The KUB Rao Working Group has come out with tougher guidelines and asked for better documentation, standardization of interest rates, stricter KYC guidelines and more transparency from gold NBFCs. But the market has interpreted it as being good for gold loan companies

A Reserve Bank of India (RBI) panel has said that the growth of gold loan non banking financial companies (NBFCs) business warrants that their operations may be closely monitored. The RBI Working Group headed by KUB Rao also expressed concern on some gold loan NBFCs which have been raising public deposits surreptitiously through unincorporated bodies. However, the stock market has interpreted the recommendations as very good for gold loan companies. At close today, Manappuram Finance soared 19.94% to close at Rs40.60 and Muthoot Finace jumped 9.51% to settle at Rs229.80 on the NSE.


The RBI, in its monetary policy statement on 17 April 2012, had raised regulatory concerns over the large rise in the gold loan business, the branch network of gold loan NBFCs, volume of loans disbursed and the quantum of bank borrowings. It also constituted a working group under KUB Rao, advisor in Department of Economic and Policy Research at the RBI.


The report said, NBFCs, predominantly engaged in lending against the collateral of gold jewellery had recorded exponential growth in recent years both in terms of size of their balance sheet and physical presence. “Based on the number of complaints received against such companies, it is apparent that the mammoth expansion had taken place at the cost of sound internal controls. Several undesirable features such as poor Know Your Customer (KYC) compliance, poor storage facilities for gold accepted as collateral, increased incidences of frauds and robberies, opaque auction procedures, all pointed towards rising operational risk as well as consumer protection issues in such companies,” it said.


Calling for monitoring transactions between gold loan NBFCs and unincorporated bodies, the panel said there is a need to bring the sister concerns floated by gold loan NBFCs under the ambit of monitoring and regulation for ensuring domestic financial stability. “There are also interlinkages within the gold loan NBFC segment in the form of gold loan NBFCs floating unincorporated sister concerns to undertake financial activities, which are not permitted by the financial regulator. Such activities primarily involve raising public deposits and diverting these funds towards registered gold loan NBFC. Raising public deposits by such illegitimate means can have implications for public confidence in the concerned NBFCs and non-banking financial sector as a whole. If such activities are not curbed in time, they can threaten the stability of financial system,” the reports said.


According to the Rao panel, since large numbers of complaints are being received against the NBFCs, there is a need for an ombudsman to hear the grievances. “This will be a no-cost service to the customers and will go a long way in disciplining the NBFCs as well,” it added.


The report said sources of funds of gold loan NBFCs do not appear to be an immediate cause of concern giving rise to concentration credit risk. “Going by the past trends, a sharp sudden drop in gold price by 30 to 40% is a remote possibility causing financial distress to the gold loan NBFCs and the extant loan to value (LTV) ratio should provide a reasonable risk cover in case the gold prices fall by 10%. Asset quality, NPAs as percent of total credit exposure and capital adequacy of gold loan NBFCs are not a cause for concern at present,” the report said.



“The committee has come out with tougher guidelines and asked for better documentation, standardization of interest rates, stricter KYC and more transparency from the companies; on the positive side it has also asked for an increase in the LTV from 60% to 75%. Hence, in our opinion although the document itself may not be extraordinarily positive for gold loan NBFCs, clarity around regulations should ease much needed funding for the sector and uncertainty amongst investors about the sector's future prospects," said Espirito Santo Investment Bank Research in a note.


The Rao Committee has said that there is a case for review of the LTV of 60% and it could be increased to 75%. However, it has also clarified that calculation of LTV should be standardised and fixed at potentially prevailing prices of 22 carat gold in the Mumbai bullion market. Currently companies are using scrap value of gold and adding to it other costs associated with the jewellery to derive the value of jewellery. The companies have formed an association called the Association of Gold Loan Companies (AGLOC) which is providing the price of gold jewellery and the available LTV. "The combined impact of these two regulations will mean that the loan per gram may not change from what is being currently offered by the gold loan companies," the brokerage said.


Loan per gram of gold (in Rs)




Price of Gold Jewellery*









Loan per Gram



Source: Company fillings, Espirito Santo Investment Bank, *as per, **as per illustration shown in the working group report


As the demand for gold loans increased at a scorching pace in recent years, gold loans NBFCs have started expanding their operations at a hurried pace through opening of their branches rapidly across the length and breadth of the country. To accommodate the large demand for such loans, these NBFCs have also increased their reliance on bank and other borrowings on a massive scale, the report said.


The RBI panel has also recommended imposing restrictions on borrowings from retail customers. On the positive side the report has clearly specified that as of now gold loan NBFCs do not pose any systemic risk to the banking system, which should ease funding from the banking system. Given the same clarity around regulations, funding from the commercial paper (CP) route should restart which was a major source of funding for many gold loan NBFCs like Manappuram historically and has totally dried up in post regulatory issues, Espirito Santo added.


The Rao panel suggested host of measures, including introduction of tax sops for instruments used to impound idle gold, and higher customs duty to discourage import of the precious metal. The RBI draft report also favours imposing value and volume limits on import of gold by banks and other agencies.


Noting that large gold imports are adversely impacting the current account deficit (CAD), the report said there is a need to moderate the demand for gold imports, as ensuring external sector’s stability is critical. “Fiscal measures to reduce the gold imports may be revisited,” said the report.


Gold import is a major constituent of India's rising CAD. The CAD widened to a record high of 5.4% of gross domestic product (GDP), or $22.3 billion, in the July-September quarter.


The report also said banks need to design innovative financial instruments that can provide real returns to investors. Recommending “introduction of tax incentives on instruments that can impound idle gold may be considered,” the report said that there is a need to convert both rural and urban demand for gold into investment in gold-backed financial instruments through dematerialisation of gold.


“Limits on the volume and value of gold to be imported by banks may be considered, if required under extreme situation” is also one the recommendations in the draft report, on which comments can be given till 18th January.


Earlier, finance minister P Chidambaram said the government is considering steps to make import of the precious metal more expensive.


The report has concluded that gold loans have a causal impact on gold imports substantiating the emergence of a liquidity motive for holding gold. Also, international gold prices and exchange rate “significantly and positively” affect the gold prices in India.


Commenting on the Rao Committee report, George Alexander Muthoot, managing director, Muthoot Finance, said, “The report has also outlined that there is no systemic implications in the financial system because of gold loan NBFCs. The recommendation of the Committee for prescribing the appropriate loan to value ratio is found suitable, while its recommendation that there is no case for conceding level playing field for the gold loan NBFC with the bank is highly appreciated.”


Delhi gangrape: Two-day PC for bus owner for giving fake documents

Police said during investigation, it came to know about the actual address of the bus owner and that 11 buses were registered in his name

New Delhi: The owner of the bus in which the 23-year-old girl was gangraped and brutally assaulted on 16th December, was on Thursday remanded in police custody for two days by a Delhi court for allegedly submitting false documents for registration of his vehicles, reports PTI.


Metropolitan Magistrate Chhavi Kapoor handed over bus owner Dinesh Yadav to police for his custodial interrogation after it submitted that his custody was required for further investigation in the matter.


The police had arrested Yadav yesterday from his residence in Rasoolpur Nawada village near Noida Sector 62 for allegedly submitting false documents for registration of his vehicles.


It has registered a criminal case of cheating and giving false statement on oath to public servant against 35-year-old Yadav.


During the proceeding, the police told the court that Yadav had submitted false information to the State Transport Department to get the registration certificate and the permit for the bus.


It added Yadav had given a false affidavit about his residential address to get the bus registered with the Delhi Transport Authority.


Police said during investigation, it came to know about the actual address of the bus owner and that 11 buses were registered in his name.


The police told the court that "the bus in which the girl was gangraped was registered by providing false information at the time of registration. The owner gave as address proof the passbook of Bank Of Baroda and the driving licence at the time of registration.


"However, as per landlord Anant Gopal, Yadav never stayed at the given address. Yadav had filed a false affidavit claiming that he is a resident at the said address."


The girl was gangraped allegedly by six persons in the moving bus on 16 December 2012 and thereafter brutally assaulted, resulting in severe injuries to her.


After initial treatment at the Safdarjung Hospital here, she was shifted to Mount Elizabeth Hospital in Singapore where she succumbed on 29th December.


The incident has drawn a nationwide outrage.


Jet Airways in talks with Etihad for stake sale

Jet Airways said its discussions with Etihad are in progress but no terms have been firmed up at present and various structures are being explored by the legal and commercial teams

Mumbai: The first investment by a foreign carrier in an Indian airline could be on the anvil with Jet Airways on Thursday announcing it was in talks with Abu Dhabi-based carrier Etihad for a possible stake sale, reports PTI.


"Jet and Etihad are in a discussion regarding a potential investment by the latter in the former... these discussions have commenced recently pursuant to the liberalised foreign direct investment (FDI) policy which permitted foreign investment in the shares of an Indian airline," Jet Airways informed the Bombay Stock Exchange.


"The discussions are in progress but no terms have been firmed up at present. Various structures are being explored by the legal and commercial teams," it said in its filing.


Following the statement, shares of Jet Airways rose sharply by about 7% to Rs618.70.


This is the first time that Jet has admitted holding talks with Etihad for potential investment since the FDI policy was amended by the government in September 2012 to allow foreign airlines pick up upto 49%equity in an Indian carrier.


Both airlines are learnt to have appointed global consultants as they want the investments to be on a sound footing, given the high operating costs in India, with reports saying the Gulf carrier's Board would meet soon to decide on the matter.


Jet said it had not yet sought any regulatory approval as a deal with Etihad was still to be firmed up. An appropriate announcement would be made upon finalisation of the terms of the investment with Etihad as per legal and regulatory requirements, the BSE filing added.


When contacted, Etihad spokesperson Thomas Clarke told PTI on phone from Abu Dhabi: "Our position (on the issue) remains the same as we have stated earlier."


Few weeks ago, Etihad had said it "has identified equity investments in other airlines as an important evolution of its successful partnership strategy."


"Such investments will be made where Etihad Airways believes the commercial prospects are strong, where there are like-minded business philosophies, and where such commitment will be welcomed. If or when we do make further investments of this sort, we will announce them in line with regulatory and commercial requirements," the Gulf carrier said.

Etihad has in the past two years picked up stake in several international carriers like Virgin Australia, airberlin, Air Seychelles and Aer Lingus.

The Jet statement also said that no time-line could be set for arriving at an agreement "considering the complexity of transnational transactions such as this, and the complexity of the legal requirements of the regulatory structure."

Jet's clarification came after reports that Etihad may buy 24% stake for about Rs1,800 crore. Similar reports have also appeared about Etihad being in talks for potential investment in Kingfisher Airlines.

Sources said that apart from stake sale, Jet and Etihad are expected to have a marketing agreement along with sharing of some flying slots under the air traffic rights.

When Etihad was set up in 2003, it had sought the help of the Naresh Goyal-owned carrier to set up its systems and Jet had given assistance with its specialists in various fields of aviation operations. Unconfirmed reports had then said Goyal had also invested some money in the Gulf carrier.

A major reason for Goyal to dilute part of his shareholding in Jet from 80% has been the order of the Foreign Investment Promotion Board (FIPB) to bring it down to the regulatory levels.


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