On the BSE on Tuesday, shares of Muthoot Finance and Manappuram Finance fell as much as 3.4% intraday. Following the Reserve Bank of India's (RBI) discovery on Monday that gold loan lenders were engaging in a number of improper activities, the share price fell. The Reserve Bank of India (RBI) noted many issues during loan lending, including improper use of risk weights, inadequate monitoring of the loan-to-value (LTV) ratio, and opaqueness during the auction of gold ornaments and jewelry after the borrower defaulted. As a result, the Central Bank has ordered banks and non-banking financial organizations (NBFCs) who provide gold loans to carefully examine their procedures and find any weaknesses.
Around 9:27 AM, the share prices of Manappuram Finance and Muthoot Finance were down 2.33 percent and 1.53 percent, respectively, at Rs 196.6 and Rs 1,999.7 on the BSE. In contrast, at the same time, the BSE Sensex had a 0.34 percent increase in trading, closing at 84,584.85.
The Reserve Bank of India (RBI) requested on Monday that suppliers of gold loans keep a careful eye on their portfolios, given the notable increase in this area relative to certain lenders. It also gave these lenders instructions via a circular to make sure that there were sufficient controls over contracted work and outside service providers.
"Although it was the first gold lender to be subject to regulatory action, IIFL Finance may not be the last. The RBI has listed several flaws in the procedures of a few chosen gold lenders in this circular, which they must fix in three months," according to analysts at Motilal Oswal Financial Services.
The RBI stated that noncompliance with regulatory guidelines in this regard will be taken seriously and will result in, among other things, supervisory action. Any actions taken by the lenders in this regard must be reported to the senior supervisory manager (SSM) of the RBI within three months of the circular's date.
The RBI also discovered after conducting its review that certain lenders were making partial payments when they were supposed to be repaying their loans. Additionally, they noted that the system did not classify gold loans as non-performing assets (NPAs), that they were extended or renewed by issuing new loans, that there was insufficient oversight by the board and senior management, and that there were no controls over third-party organizations.
A non-performing asset (NPA) is a loan or advance that the lender loses money on when the borrower defaults on it. The RBI's assessments are sentimentally unfavorable for the gold lenders, according to MOFSL.
"For better clarity, we look forward to engaging 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," it continued.
Global stockbroker Jefferies employees also mentioned that the RBI's findings and more stringent regulatory oversight might have a short-term negative impact on growth. "We anticipate that big NBFCs, such as Muthoot Finance, would be unaffected. Since IIFL Finance has already taken remedial action, it may also be safe, the brokerage allegedly stated in its note.
