Shares of gold loan firms lost heavily on Tuesday after a Reserve Bank of India rap on a major entity, Manappuram Finance, for breaching the rules on raising money from the public.
Manappuram hit the bottom circuit, losing 20 per cent to close at Rs 45.5 on the Bombay Stock Exchange. Muthoot Finance, the other listed gold lender, lost 4.3 per cent.
RBI says Manappuram has been told not to accept deposits from the public. Manappuram says it does not. “However, it is accepting investments through secured non-convertible debentures (NCDs) and subordinate bonds, which do not fall under the definition of public deposit,” argued I Unnikrishnan, managing director.
Some analysts say a reading of both statements together cast a shadow on an important money raising tool of both the major firms, over-the-counter (OTC) NCDs.
Arun Kejriwal, founder of Kejriwal Research and Investment Services, said, “The two statements put together mean that Manappuram has continued to raise public deposits under the garb of OTC NCDs. After the RBI move, the market has understood this model better; that is why the shares are down 20 per cent.”
OTC debentures are different from their listed counterparts, which are issued in the form of a public issue and listed on the exchanges. These OTC debentures, privately placed, are issued by gold loan firms on applications by walk-in customers. Usually, these are secured by gold deposits with these firms. Several crores are raised through these debentures and the money used for further lending against gold.
At present, a debenture issue carrying a coupon of 13–14 per cent is being sold by one of these firms. Employees are incentivised to canvass for these deposits, according to people familiar with these issues.
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Business Standard had reported an RBI probe into money raising routes of gold loan companies last June. The companies argue the debentures are legitimate. An official with a gold loan firm said, “The RBI move is company-specific and it does not have any impact on the sector. There is no issue with secured NCDs. The business model is intact.”
But, a few public sector banks had raised concerns about this practice with RBI. The gold firms argue that as non-deposit taking non banking financial intermediaries, they are not subject to restrictions like liquidity reserves and cash reserves like banks, their main competitors, are. This makes their cost of funds much lower and margins much better.
However, it exposes them to that much more risk, as there is no protection against depreciation in gold prices or liquidity risks.
Kejriwal said since these firms have accessed the capital market and raised money through listed debentures, there is no reason they should continue the old practice.
RBI also found had used another entity carrying the same name for money raising. “It is common for these companies to float multiple entities with the same first name. When the customer walks in and pays the money, he often buys into the brand name and office; he is not looking at which sub-entity is collecting money and which one is issuing the receipt,” said a former employee with one of these firms.
“The Reserve Bank has stated that acceptance of deposits by either Manappuram Finance Ltd or by Manappuram Agro Farms (Magro) is punishable with imprisonment and has cautioned members of the public that those who deposit money with either do so at their own risk,” the RBI release said.
An RBI official said, “The release was specific to one firm. If there are issues with other firms, then you have to wait for our announcements on the same.”