RBI probes gold loan financiers on KYC adherence

MUMBAI: The RBI is probing the books of some gold financing companies to assess the implication of concentration risk that could make the non-banking sector shaky in the event of a sharp fall in gold prices, as it happened with silver recently. The banking regulator may also probe whether these companies follow the know-your-customer (KYC) norms, said two people familiar with the development.

“We are examining the books of select non-banking finance companies (NBFCs) involved in gold financing,” an RBI spokesperson said, confirming the development. Muthoot Finance and Manappuram General Finance & Leasing are the largest gold financiers that are listed on the Bombay Stock Exchange.

A person familiar with the complaint said, “The probe comes after a few public sector bank chairmen complained to the central bank that some gold finance companies were violating KYC norms.”

“The RBI has also been concerned with the rapid growth in these NBFCs’ balance sheets. As a part of the examination, they are also probing whether these NBFCs have violated any norms with regard to fund-raising,” the person said, seeking anonymity.

Email queries to both Muthoot and Manappuram were unanswered at the time of going to press.
The fear of concentration risk arises when a financial institution has large exposure to a particular asset, in this case gold. The central bank is concerned that any sharp correction in gold prices could adversely impact the operation of these companies as the value of the underlying asset would decline.

“The KYC issue could be at the customer end,” said Ashwin Parekh, partner at consultant Ernst & Young. “Customers could procure gold through unorganised means, which could be used as a collateral to get a loan. Here, the customer may not be interested in repaying the loan and also be okay with the gold being forfeited.”

According to one analyst working with a foreign brokerage: "The business model of gold loan companies is directly related to gold price movement. A fall in gold price would lead to reduction in its loan book ."

Manappuram's loan to book value (LTV) is around 70%. It means that for 1 lakh worth of gold pledged, a borrower will get a loan of 70,000. If gold prices decline, the loan size too will reduce. Muthoot maintains that the LTV ratio at origination was around 75%.

The size of the gold loan market in India was at 50,000 crore during 2010-11. The organised gold loan market in India has been growing at a CAGR of 40% over the past eight years, according to an IMACS report. Gold and silver prices have appreciated by 19.5% and 92%, respectively, in the past one year. In the past two months, gold and silver prices have appreciated 7.8% and 1%, respectively. Currently, gold and silver are trading at 22,740 per 10 gm and 56,903 per kg, respectively.
To reduce the risk in the system, the RBI recently said bank credit to NBFCs for giving loans against gold jewellery will not be treated as exposure to the agricultural sector.