Muthoot Finance, Manappuram Finance shares: Red flags over gold loan practices! Will it hit stocks? #CashNews.co

The Reserve Bank of India (RBI) has identified irregular practices in the grant of gold loans, giving lenders three months to make amends to avoid any further supervisory action. This is a sentimental negative for the gold lenders, analysts said.

The circular will have an impact on loan growth of third parties like fintechs, banks having co-lending tie-ups and smaller NBFCs in gold lending. But a gold loan growth slowdown in banks, fintechs and smaller NBFCs is likely to benefit Muthoot Finance Ltd and Manappuram Finance Ltd, Nirmal Bang Institutional Equities said in a note.

“As per their recent concall, both the companies are compliant with cash disbursal limit of Rs 20,000 under the Income Tax Act, 1961. The average LTV of MFL and MGFL stood at 63.4 per cent and 60.3 per cent respectively in 1QFY25, which was much below the LTV cap of 75 per cent for retail gold loans. As per our channel checks with various lenders including MFL and MGFL, we found them to be transparent while dealing with customers, they have their own inhouse valuers and have the required infrastructure for gold lending,” Nirmal Bang said.

For better clarity, MOFSL said it will look forward to engage with the gold lenders to understand the observations made by RBI with regards to their gold lending processes and corrective actions which may be required at their end.

While IIFL Finance was the first among gold lenders to face supervisory action, it might not be the last, MOFSL warned.

“In this circular, the RBI has put out a laundry list of deficiencies in the processes of select gold lenders which they are expected to address within three months. Actions taken in response to the aforementioned directive should be promptly communicated to the RBI within a three-month timeframe. A failure to comply with these regulatory guidelines will be considered a serious breach and may result in supervisory action by the RBI,” it noted.

The RBI has also asked the gold lending institutions to closely monitor their gold loan portfolio, particularly in light of the significant growth in the gold loan portfolio of select gold lenders. RBI has also asked the lenders to ensure adequate controls are put in place over outsourced activities and third-party service providers.

Morgan Stanley reportedly said that while older lenders like Muthoot Finance and Manappuram, given its much cheaper valuations, are well-positioned, some overhang cannot be ruled out.