Muthoot Finance, Manappuram Finance: Gold financiers' stocks slip post RBI report on gold loan businesses; check details

Last seen, Manappuram Finance was trading 1.74% lower at ₹197.80 on the BSE, while Muthoot Finance was trading 1.89% lower at ₹1,992.50. IIFL Finance, on the other hand, was trading 1% higher at ₹467.85 on the BSE. 

Last month, the Reserve Bank of India (RBI) removed restrictions on IIFL Finance's gold finance business. Following the embargo, the company faced major issues related to credit availability for servicing the gold loan business.

A recent review on adherence to prudential guidelines revealed several deficiencies with regard to loans against pledge of gold ornaments and jewellery, the central bank said in a communication to lenders.

The major deficiencies include shortcomings in use of third parties for sourcing and appraisal of loans, valuation of gold without the presence of the customer, inadequate due diligence and lack of end-use monitoring of gold loans, and lack of transparency during auction of gold ornaments and jewellery in case of a default, the RBI said.

A recent study by the rating agency Icra said there is a handsome growth in the gold loans despite recent actions by the regulator and estimated the portfolio of organised gold lenders to grow to Rs 10 lakh crore by March 2025.

It also found weaknesses in monitoring of loan-to-value ratios and incorrect application of risk weights, among other shortcomings.

It advised all supervised entities into the gold loan business to undertake a "comprehensive review" of their policies and processes, identify the gaps, and initiate appropriate remedial measures in a "timebound manner."

"The gold loan portfolio should be closely monitored, especially in the light of significant growth in the portfolio in certain SEs (supervised entities)," the notification read.

A recent report by PwC notes that gold maintains a distinct and revered status as a symbol of financial prosperity within a majority of Indian households since it is considered to be a tangible marker of social prestige for many. Gold assets are not merely considered to be a financial asset but are also symbols of cultural heritage often passed down from one generation to the next.

"Gold loans are a secured financial product offered by banks and nonbanking financial companies (NBFCs) in the regulated environment and local money lenders in the unregulated space. In this arrangement, customers provide their gold jewellery as collateral and, in return, the lending institution disburses the loan based on the prevailing market value of the pledged gold. While there has been a trend towards the formalisation of gold loans in recent years, a considerable portion of the market remains unorganised," the PwC report added. 

Muthoot Finance, Manappuram Finance: How shares have performed