Gold Loan NBFC Stocks Recover After RBI Clarifies No Plans to Tighten Lending Norms
Stocks of major gold loan lenders such as Muthoot Finance, IIFL Finance, and Manappuram Finance partially recovered on April 9 following the Reserve Bank of India (RBI) clarification that it has not suggested the tightening of gold loan norms. The clarification came in response to fears being roused by comments during the central bank’s monetary policy announcement.
During a post-policy press conference in Mumbai, the RBI Governor clarified that there was no reference to any tightening of the current gold loan rules. The clarification was followed by allaying market fears with a bounce back in the stock of various non-banking financial corporations (NBFCs) largely dependent on gold-backed borrowings.
Earlier during the day, the shares of Muthoot Finance had touched the 10% lower circuit. But by 12:35 pm, the stock had rallied considerably to be trading only 5% below. Likewise, IIFL Finance shares were up close to 6 percentage points from the lows and trading at Rs 325 per piece, down just 2.4%. Similarly, other shares, such as those of Manappuram Finance and Cholamandalam Investment, also recorded partial recovery.
The RBI Governor had previously stated that detailed guidelines for loans against gold as well as for non-fund-based credit exposures would be issued in the near future. The intent of these guidelines is to align the regulations across all categories of regulated entities with consideration for their differing risk-bearing capabilities. These loans, which are usually collateralised by gold ornaments or jewellery, are made for consumption as well as for earning activities.
The central bank also announced plans to roll out co-lending guidelines to all regulated institutions. This is intended to bring uniformity to lending activities across the financial institutions that engage in such credit agreements.
The announcement by RBI of cutting the repo rate for a second consecutive time and opting to pursue an accommodative stance was also underscored during the declaration. The move indicates scope for more rate reductions in order to favour the economy, which faces pressures from outside the country based on global elements such as tariff imposition by the United States.
The RBI clarification also benefitted other banks with large gold loan books. Federal Bank, with about 15% of its overall loan book in gold loans, and CSB Bank, with well over 40% exposure, also saw their stocks bounce back after the clarification.
Gold loans constitute a significant proportion of the loan book for most NBFCs. Take the case of Muthoot Finance, which generates 98% of its loan book on gold-backed lending and Manappuram Finance at 50%. IIFL Finance, however, has around 21% of its book in gold loans.
The guarantee of the central bank that it is not tightening the norms but rather striving towards standardised and complete regulation has given temporary relief to the sector and its investors.
