Muthoot Finance, the largest gold loan non-banking finance company (NBFC) in the country, is set to tweak its business model while filing the draft red herring prospectus (DRHP) after factoring in the Reserve Bank of India’s (RBI’s) recent directive on gold loans.
Recently, RBI notified that bank credit to NBFCs giving loans to individuals and other entities against gold jewellery would not be treated as exposure to the priority sector. The move is expected to impact the borrowing cost of these companies, which account for more than 32 per cent of the Rs 80,000-crore gold loan market in India, as regular loans are costlier than priority sector loans.
Moreover, as these loans will not enjoy priority sector status, the pace of securitisation or assignment to other banks will also fall, which may hit these NBFCs. Selling receivables was one of the main source of capital for these NBFCs. It also helped banks meet priority sector targets.
“Keeping in mind the borrowing cost and receivables, Muthoot will have to rework its business strategy. While filing DRHP, it will have to re-visit its projected cash flow, borrowing sources and accordingly re-access future earning estimates in RHP,” said an official with a bank handling the issue.
“I do not see any major impact on our business. However, we are taking into account all the scenarios that may emerge after the new circular. Whatever modifications are required will be included in the RHP,” Oommen K Mammen, chief financial officer, Muthoot Finance, told Business Standard.
Muthoot Finance, the largest NBFC in the sector, is planning a Rs 800 crore public issue. It filed DRHP on September 2010.
Mammen added that the incremental cost of borrowing would rise by 50-100 basis points after the circular as regular loans attracted higher rates than priority sector loans.
According to an industry analyst, under the base rate regime, the borrowing cost differential between regular and the agriculture loans (a priority sector loan) is 100-200 basis points.
The Kerala-based NBFC had a gold loan portfolio of Rs 7,341.7 crore as on September 30, 2010, compared to Rs 3,389 crore in the year-ago period.
Banks accounts for nearly 50 per cent of its borrowings and stood at Rs 2,127.87 crore on September 31, 2010, according to the DRHP. During the period, the company sold receivables worth Rs 2,008 crore to banks.
According to data by Icra Management Consulting Services, till December 2010, on a year-on-year basis, NBFCs in the sector had grown their books by 72 per cent compared to banks’ growth rate of 32-37 per cent.
“The main reason has been the higher loan-to-value ratio, ensuring maximum value of loan in return for gold, lesser documentation and faster disbursals,” said an industry analyst.
“The loan-to-value ratio for a 22-carat jewellery piece varies from 55 per cent to 65 per cent in case of banks while it varies from 70 per cent to 80 per cent for NBFCs. Interest rates charged by banks and NBFCs also differ,” said an official at Muthoot Finance.
