Gold Financing Companies Under RBI Scrutiny: Muthoot and Manappuram Finance Shares Drop Over 3%

Shares of Muthoot Finance and Manappuram Finance fell by as much as 3.4% intraday on the BSE on Tuesday. This decline followed the Reserve Bank of India's (RBI) findings on Monday, which revealed several irregular practices among gold loan financiers.

The RBI identified issues such as improper application of risk weights, inadequate monitoring of loan-to-value (LTV) ratios, and a lack of transparency during the auction of gold ornaments and jewellery in cases of customer defaults.

In response, the Central Bank has instructed banks and non-banking financial companies (NBFCs) offering gold loans to conduct a comprehensive review of their policies and address any identified gaps.

As of approximately 9:27 AM, Muthoot Finance's share price had decreased by 1.53% to Rs 1,999.7 per share, while Manappuram Finance's share price fell by 2.33% to Rs 196.6 on the BSE. In contrast, the BSE Sensex was trading 0.34% higher at 84,584.85 during the same period.

On Monday, the RBI urged gold loan providers to closely monitor their gold loan portfolios due to significant growth observed in this sector among certain lenders. Through a circular, the Central Bank also mandated that these lenders establish robust controls over outsourced activities and third-party service providers. Analysts at Motilal Oswal Financial Services noted, "While IIFL Finance was the first among gold lenders to face supervisory action, it may not be the last. The RBI's circular highlights numerous deficiencies in the processes of select gold lenders, which are expected to be addressed within three months."

Any actions taken by the lenders in response to the RBI's circular must be reported to the Senior Supervisory Manager (SSM) of the RBI within three months. The central bank emphasised that non-compliance with these regulatory guidelines will be treated seriously and may result in supervisory action, among other consequences.

Following its assessment, the RBI identified that some lenders were rolling over loans at the end of their term through partial payments. Additionally, it found that gold loans were not classified as non-performing assets (NPAs) within the system, leading to the practice of evergreening by extending outstanding loans or issuing new ones. The RBI also noted insufficient senior management and board oversight, as well as a lack of controls over third-party organisations.

An NPA is defined as a loan or advance that a borrower fails to repay on time, resulting in a loss of income for the lender.

According to Motilal Oswal Financial Services (MOFSL), the RBI's findings are sentimentally negative for gold lenders. They expressed a desire to engage with these lenders for further clarification on the RBI's observations regarding their gold lending practices and any necessary corrective actions.

Global brokerage Jefferies echoed similar sentiments, stating that the RBI's observations and stricter regulatory checks may hinder growth in the near term. However, they expect larger non-banking financial companies (NBFCs) like Muthoot Finance to remain unaffected, and IIFL Finance may also be insulated as it has already implemented corrective measures.