Gold loans hide threat of shadow banking in India
Dec 20 2012 , Bloomberg
When Rashmi Deshmukh needed money for her hand-knit clothing business in Mumbai, she couldn’t wait for bank approval. Instead, she put up her wedding jewellry as collateral at a loan-for-gold company to get cash on the spot.
Muthoot Fincorp, which advertises three-minute gold loans and has 3,125 branches across India, charged 24 per cent annual interest. While a bank gets half that rate, it would have loaned her less and required paperwork, she said.
“It’s faster, it’s easier, it isn’t cheaper, but I get more for my gold from Muthoot than the bank,” said Deshmukh, 37, who borrowed Rs 2,50,000 ($4,576) in October because she had more orders than yarn ahead of this year’s holiday season.
Assets at non-bank lenders such as Muthoot have increased 20 per cent annually for the past five years to $670 billion, according to a November report by the Financial Stability Board. That makes India the world’s second-fastest-growing market, after Indonesia, for lending outside the banking system, or shadow banking. It also poses risks for a country where 65 per cent of the population and 92 per cent of small businesses don’t have access to banks, World Bank and government data show.
“With non-bank companies accounting for almost 40 per cent of India’s financial system, policy makers are struggling to tame inflation and reverse slowing growth,” said Ashima Goyal, a Mumbai-based economics professor and member of the central bank’s technical advisory committee. While the Reserve Bank of India (RBI) raised interest rates 13 times from mid-March 2010 through April of this year, inflation has remained above 8 per cent for 21 of 26 months, according to data compiled by Bloomberg.
Having so much money outside government control “stands in the way of smooth transmission of monetary policy,” Goyal said. “This challenge is at the root of India’s struggle to administer policy that will trigger the kind of growth the world is expecting out of India.”
The largely unregulated shadow-banking system also creates risks for Indians putting money into alternative investments. More than 6,000 people in the southern state of Tamil Nadu filed complaints in the past five months after investing in emu farms that failed to pay promised returns. Sahara group, which owns New York’s Plaza Hotel, was ordered by India’s Supreme Court in August to refund 22 million investors $3 billion obtained through improper bond sales in the country’s largest case involving a non-bank financial firm.
The official figure for India’s shadow-banking industry counts only what non-bank financial companies register with the central bank. The true size is much larger, including private lending and money channeled into more than 10,000 collective investment funds known as chits.
“It’s impossible to calculate,” said Kavita Rao, an economist at the National Institute of Public Finance and Policy in New Delhi who was appointed by the government last year to lead a panel to study the black-market economy. “India’s shadows are dark and deep. There’s just no way to know how much our informal lending is worth.”
“If the government knew where all loans went, it could more effectively target measures to direct the economy,” said Shinjini Kumar, a director at PricewaterhouseCoopers in Mumbai.
“When liquidity goes and gets trapped and doesn’t create economic activity, that’s where there’s great concern for stunting economic growth,” Kumar said.
Expansion of India’s $1.85 trillion economy slowed to 5.3 per cent in September, from 11.2 per cent in March 2010, when it was the highest in at least a decade, according to the government statistics office. November’s wholesale price index was 7.24 per cent, the highest inflation rate among so-called Bric nations.
Muthoot Fincorp, which advertises three-minute gold loans and has 3,125 branches across India, charged 24 per cent annual interest. While a bank gets half that rate, it would have loaned her less and required paperwork, she said.
“It’s faster, it’s easier, it isn’t cheaper, but I get more for my gold from Muthoot than the bank,” said Deshmukh, 37, who borrowed Rs 2,50,000 ($4,576) in October because she had more orders than yarn ahead of this year’s holiday season.
Assets at non-bank lenders such as Muthoot have increased 20 per cent annually for the past five years to $670 billion, according to a November report by the Financial Stability Board. That makes India the world’s second-fastest-growing market, after Indonesia, for lending outside the banking system, or shadow banking. It also poses risks for a country where 65 per cent of the population and 92 per cent of small businesses don’t have access to banks, World Bank and government data show.
“With non-bank companies accounting for almost 40 per cent of India’s financial system, policy makers are struggling to tame inflation and reverse slowing growth,” said Ashima Goyal, a Mumbai-based economics professor and member of the central bank’s technical advisory committee. While the Reserve Bank of India (RBI) raised interest rates 13 times from mid-March 2010 through April of this year, inflation has remained above 8 per cent for 21 of 26 months, according to data compiled by Bloomberg.
Having so much money outside government control “stands in the way of smooth transmission of monetary policy,” Goyal said. “This challenge is at the root of India’s struggle to administer policy that will trigger the kind of growth the world is expecting out of India.”
The largely unregulated shadow-banking system also creates risks for Indians putting money into alternative investments. More than 6,000 people in the southern state of Tamil Nadu filed complaints in the past five months after investing in emu farms that failed to pay promised returns. Sahara group, which owns New York’s Plaza Hotel, was ordered by India’s Supreme Court in August to refund 22 million investors $3 billion obtained through improper bond sales in the country’s largest case involving a non-bank financial firm.
The official figure for India’s shadow-banking industry counts only what non-bank financial companies register with the central bank. The true size is much larger, including private lending and money channeled into more than 10,000 collective investment funds known as chits.
“It’s impossible to calculate,” said Kavita Rao, an economist at the National Institute of Public Finance and Policy in New Delhi who was appointed by the government last year to lead a panel to study the black-market economy. “India’s shadows are dark and deep. There’s just no way to know how much our informal lending is worth.”
“If the government knew where all loans went, it could more effectively target measures to direct the economy,” said Shinjini Kumar, a director at PricewaterhouseCoopers in Mumbai.
“When liquidity goes and gets trapped and doesn’t create economic activity, that’s where there’s great concern for stunting economic growth,” Kumar said.
Expansion of India’s $1.85 trillion economy slowed to 5.3 per cent in September, from 11.2 per cent in March 2010, when it was the highest in at least a decade, according to the government statistics office. November’s wholesale price index was 7.24 per cent, the highest inflation rate among so-called Bric nations.
RBI report calls for close watch on working of gold loan NBFCs ( Business Line)
MUMBAI, JAN. 3:
Operations of gold loan non-banking finance companies, especially the transactions between them and their respective sister concerns, need careful monitoring, according to the Reserve Bank of India.
Gold loan NBFCs have unincorporated sister concerns to undertake financial activities, which are not permitted by the regulator. Such activities primarily involve raising public deposits and diverting these funds towards the registered gold loan NBFC.
The RBI’s working group on issues related to gold imports and gold loans by NBFCs said raising public deposits by such illegitimate means can have implications for public confidence in the NBFCs concerned and the non-banking financial sector as a whole.
“If such activities are not curbed in time, they can threaten the stability of the financial system. There is a need for monitoring transactions between gold loan NBFCs and unincorporated bodies,” the group said in its report.
The report said the rapid growth of assets, borrowings and branch network of gold loan NBFCs needs to be monitored continuously through frequent review of relevant data.
There is also a need to reduce the interconnectedness of the gold loan NBFCs with the formal financial system over the medium to long run, said a RBI panel.
Keeping in view the declining capital adequacy ratio of the NBFCs, there is a need to improve their capital.
NCD ROUTE
The current stipulations pertaining to raising resources through non-convertible debentures (NCDs) need to be reviewed. Many of the gold loan NBFCs have resorted to NCDs in the recent past to enhance their working capital funds.
Further, the exemption available to secured debentures from the definition of ‘deposit’ may be reviewed.
The auction of gold (loan defaulters’ gold collateral) by the NBFCs needs a relook. Auctions should be conducted at a price closer to the market price.
The RBI panel said there is no case for conceding complete level playing-field for gold loan NBFCs with banks.
Rationalisation of interest rate structure of these NBFCs should be a priority.
Much of the loan portfolio of these NBFCs are at an average interest rate of 24-26 per cent and only 2 per cent of their portfolio is at 12 per cent.
The RBI said, as of now, the gold loan NBFCs do not pose a problem for financial stability. Going by the past trends, a drop in gold price by 30-40 per cent is a remote possibility causing financial distress to the gold loans NBFCs.
CURRENTLY STABLE
The emotional or sentimental attachment of gold jewelleries to the owners is considered to be the greatest guarantee against any default in gold loan business in India.
Ever increasing price trend of gold in recent years also acts against any attempt to default by borrowers as any default will only result in a loss of value for the customers. Therefore, the level of defaults or non-performing loans is negligible in these segments at around 0.4-0.5 per cent.
The practices followed by gold loans NBFCs need a relook to ensure customer protection. In this regard, there is a need to ensure transparent communication of loan terms. Institution of a customer complaint and grievance redressal system is important, said the report.
http://www.thehindubusinessline.com/industry-and-economy/banking/rbi-report-calls-for-close-watch-on-working-of-gold-loan-nbfcs/article4269723.ece
| Draft norms on lending against gold seen easing investors' fears | |||||||||||||||||||||||||
| Muthoot Finance shares rise 9.5%, Manappuram stocks surge 20% | |||||||||||||||||||||||||
| BS Reporter / Mumbai Jan 04, 2013, 01:39 IST The draft norms on lending against the yellow metal appear to have placated investors’ concerns, as shares of gold loan companies surged by 10-20 per cent in Thursday's trade. A working group of the Reserve Bank of India ( RBI), under the chairmanship of KUB Rao, admitted there is a need to increase monetisation of idle gold stocks in the economy for productive purposes. It suggested a higher loan-to-value ratio for gold loan companies (75 per cent versus 60 per cent) that will allow non-banking finance companies ( NBFC) to lend more money against gold securities. For the past one year shares of gold loan companies have significantly underperformed banking stocks due to regulatory overhang. The “much-awaited” draft rules, released yesterday, seem to ease fears of regulatory hurdles in gold loan business. Shares of Muthoot Finance touched a 52-week high in intra-day trade and ended 9.5 per cent up, at Rs 229.80 on the National Stock Exchange ( NSE). Manappuram Finance’s shares jumped close to 20 per cent to close at Rs 40.60 on NSE. “With KUB Rao Committee report reaffirming the systemic importance of gold loan companies, the overhang will subside,” Kunal Shah, analyst with Edelweiss Securities, said in his note to clients on Thursday. Analysts said while the proposed rules on interest rate cap, restriction on raising retail non-convertible debentures and cap on branch expansion might hurt gold loan companies’ businesses to a certain extent, the draft norms are less severe than anticipated. “We read this as exhaustive representation of all possible customer complaints, and it is unlikely that every recommendation will materialise in the prescribed format,” Shah noted. According to rating agency ICRA, the curb on NCDs is likely to affect gold loan companies that have higher reliance on retail funding. Another rating agency said the overall norms might hit the companies. “The report, if implemented, will have a negative impact on gold loan companies. Review of certain type of NCD issuances, cap on interest rates, tightening of valuations standards, lower leverage and curbs on branch expansion, among others, would hit these companies,” said Ehsan Syed, director, bank and financial institutions, India Ratings & Research.  Among gold loan companies, Muthoot Finance has one of the highest dependence on privately placed NCDs (around 37 per cent of its total funding is through this route). However, the Kerala-based gold loan company remained positive on the draft rules.“The committee’s report on the gold loan sector is very positive. The release of the report will remove the negative perception created in the market about gold loan business... The recommendation of the committee for prescribing the appropriate loan to value ratio is found suitable, while its recommendation that there is no case for conceding level playing field for the gold loan NBFC with the bank is highly appreciated,” George Alexander Muthoot, managing director of Muthoot Finance, said. Bankers admitted the draft norms would be positive for gold loan industry. “It is good for banks as it removes uncertainties on the business and it also looks encouraging for NBFCs,” said D Sampath, head of retail banking at Federal Bank, which has a gold loan portfolio of Rs 5,600 crore.
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