Gold Loan Companies: Gold loan companies slip as RBI orders corrective measures for lapses

Mumbai: Shares of gold loan companies lost sheen on Tuesday after the Reserve Bank of India (RBI) called for these companies to take corrective measures for the lapses in loan sanctioning practices in the next three months. Muthoot Finance fell 3.9% and Manappuram Finance declined 1.9% as analysts see the central bank’s action weighing on their ROAs (return on assets) – a key profitability ratio for lenders.

The issues highlighted by RBI include improper valuation, breaches of loan-to-value (LTV) ratios, and inadequate governance in partnerships with fintech entities, said Shrikant Chouhan, head of equity research at Kotak Securities.

IIFL Finance was up nearly 0.5%. Shares of private banks like Federal Bank, CSB Bank, South Indian Bank and Dhanlaxmi Bank, which also are also major lenders against gold, ended either flat or lower.

“Our prognosis suggests that specialised financiers like Muthoot and Manappuram Finance remain largely unstirred in light of regulatory observations on gold lending practices. We also learnt it’s the banks that have largely been flouting the said norms under the garb of agri-led gold loans and in quest of achieving PSL(priority sector lending) targets,” said Shweta Daptardar, vice president – equity research at Elara Capital, in a note.

She reiterated a ‘Buy’ rating on Muthoot Finance and said that Tuesday’s correction in Muthoot offers a good entry point into a formidable franchise backed by sectoral tailwinds (expert interactions suggest continued gold price and gold demand traction) and strong fundamental credentials.

Price of 10 grams of 24k gold has gone up by around ₹20,000 in the past year. Gold prices were at ₹77,500 at close on Tuesday, up ₹4,000 in a month.”The gold finance companies will now have to focus more on the procedural aspects as mentioned by RBI, which is expected to increase their compliance costs,” said Pankaj Pandey, head of fundamental research at ICICI Direct. “However, the industry has massive tailwinds from the gold prices going up, due to the rate cuts globally and expectations in India, which will help them in AUM growth.”