Gold loans were discussed in October 2011.
Gold Loans
In a recent development RBI has imposed certain restrictions on the operations of Gold Loan companies. I am putting them out in short:
1. LTV (Loan-to-value) ratio <= 60% on all gold loans.
2. 12% Tier-I capital adequacy for all Gold Loan NBFCs by April 2014.
3. No lending against gold bars/biscuits. Only jewellery allowed as collateral.
Very heady growth, high RoEs or umpteen new entrants??..difficult to pin point what exactly would have been the reason for RBI action.
High RoEs are a big function of asset quality. As we have discussed, gold loans are almost AAA standard loans (unless lending was done at 85%+ LTVs). Good quality assets, even if growing fast, logically should have not worried RBI.
Moreover, the industry as a whole is drawing people away from the pawn brokers, who charge exorbitant rates on similar loans. So it had some social benefits as well.
So then what prompted RBI to take such severe action??
Maybe we should just step back and have a look at the broader picture.
Muthoot Finance was expected to end the year at 26000 cr of AUM. As has been discussed in the previous article, this would have roughly meant that Muthoot has disbursed around (75000 cr of loans in the year, taking on an avg of 4 months tenure as per company provided information)
If Muthoot is 20% of the overall organised gold loan industry, that would have meant a rough disbursement of anywhere between 3.5-4 lac cr. in FY12. That number would have meant that gold loan NBFC/Banks were giving short term funds to support approximately 4-5% of India's GDP!!! And this was only the organised sector!!!
The calculations can be slightly off, but the quantum is probably enough to make RBI apprehensive, I think.
What may have added to RBI's anxieties is that the end-use of all such loans is not well documented. Given the fungibility between cash and gold, I would think, it was discomforting for RBI to see the kind of numbers that were being talked about.
(I am personally very sceptical of asset size and growth being talked about, but I have been wrong many times before)
Attractive RoEs lured many new entrants.That would have increased the probability of mischief.
I, unfortunately, cant read RBI's mind. But what I have outlined above, could probably have been the triggers for RBI to come up with some action.
These restrictions are sure to dent the business prospects of all involved in the industry. They may hurt newcomers more than the well settled ones.
The size of the effect and how long will they last, is still not clear to me.
"All that glitters is not gold" is very clear, though!!
Gold Loans
In a recent development RBI has imposed certain restrictions on the operations of Gold Loan companies. I am putting them out in short:
1. LTV (Loan-to-value) ratio <= 60% on all gold loans.
2. 12% Tier-I capital adequacy for all Gold Loan NBFCs by April 2014.
3. No lending against gold bars/biscuits. Only jewellery allowed as collateral.
Very heady growth, high RoEs or umpteen new entrants??..difficult to pin point what exactly would have been the reason for RBI action.
High RoEs are a big function of asset quality. As we have discussed, gold loans are almost AAA standard loans (unless lending was done at 85%+ LTVs). Good quality assets, even if growing fast, logically should have not worried RBI.
Moreover, the industry as a whole is drawing people away from the pawn brokers, who charge exorbitant rates on similar loans. So it had some social benefits as well.
So then what prompted RBI to take such severe action??
Maybe we should just step back and have a look at the broader picture.
Muthoot Finance was expected to end the year at 26000 cr of AUM. As has been discussed in the previous article, this would have roughly meant that Muthoot has disbursed around (75000 cr of loans in the year, taking on an avg of 4 months tenure as per company provided information)
If Muthoot is 20% of the overall organised gold loan industry, that would have meant a rough disbursement of anywhere between 3.5-4 lac cr. in FY12. That number would have meant that gold loan NBFC/Banks were giving short term funds to support approximately 4-5% of India's GDP!!! And this was only the organised sector!!!
The calculations can be slightly off, but the quantum is probably enough to make RBI apprehensive, I think.
What may have added to RBI's anxieties is that the end-use of all such loans is not well documented. Given the fungibility between cash and gold, I would think, it was discomforting for RBI to see the kind of numbers that were being talked about.
(I am personally very sceptical of asset size and growth being talked about, but I have been wrong many times before)
Attractive RoEs lured many new entrants.That would have increased the probability of mischief.
I, unfortunately, cant read RBI's mind. But what I have outlined above, could probably have been the triggers for RBI to come up with some action.
These restrictions are sure to dent the business prospects of all involved in the industry. They may hurt newcomers more than the well settled ones.
The size of the effect and how long will they last, is still not clear to me.
"All that glitters is not gold" is very clear, though!!
2 comments:
What IF QE3 in US is rolled out .. EU goes for LTRO 3 or any other version of liquidity stimulus ? Chinese house wives I read have started buying Gold. There are manym macros which would guard the Gold prices.. All said, the charts see the unseen and beyond obvious so would be interesting to see the action in Gold till end of 2012. If Gold need to shorted what would be a good hedge on that trade ?
I am not sure how Gold will behave in INR...most of us are already long gold in our households....so if you are shorting gold in INR then you are hedging that long position..Gold in USD also seems to be middling...neither crapping out nor zooming up....but I would still think given the price movement in spite of all the good news...gold maybe headed for a deeper correction in USD terms...
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