Shares of Manappuram Finance and Muthoot Finance crashed on the bourses Wednesday after a Reserve Bank of India directive capping the loan-to-value (LTV) ratio at 60%.
Muthoot Finance shares hit 52-week low to Rs 130.30 in early trade. Shares of the company closed 9.9% lower at Rs 146.65 on the BSE. Shares of Manappuram Finance plunged 18.5% and ended at Rs 36.90. The BSE Sensex plunged 405 points or 2.3% at 17,196.
"Lower LTVs would also put NBFCs at a disadvantage to banks/money lenders," said brokerage Religare in a report.
Kotak said in another report that the cap on loan-to-value ratio would impact growth and margins.
George Alexander Muthoot MD of Muthoot Finance told NDTV Profit: "Our tier I capital is at 13.37% against the mandatory 12% requirement. As a policy, we don't finance against bullion and this RBI directive is to contain the rising gold price. We have advances of Rs 24,000 crore while the value of the jewellery is more than Rs 40,000 crore so we are below the LTV cap.
This notice is because many new players are coming into the sector who may not know the nuances of this sector. The RBI has come out with this regulation so that old players are de-risked and new players are cautioned."
Here are 5 reasons for the stock crash:
1) The Reserve Bank of India said that all non-banking finance companies (NBFCs) that lend against gold as collateral should maintain a loan-to-value ratio not exceeding 60 per cent for loans granted against gold jewellery. NBFCs should not grant any advance against bullion/ primary gold and gold coins. This means there would be no lending against pure gold and gold coins.
2) The current loan-to-value for Manappuram stands at 75 per cent and for Muthoot at 62 per cent. These companies would have to bring this down to the level.
3) The companies should also disclose in their balance sheet the percentage of such loans to their total assets. All NBFCs with such loans comprising 50 per cent or more of their financial assets shall maintain a minimum tier-1 capital of 12 per cent by April 1, 2014, the RBI said.
4) The prudential norms have been imposed considering the rapid growth of such firms and nature of their business model which has increased dependence on public finance, the RBI said in a notification on its website.
5) The RBI move could discourage borrowing against gold. India is the biggest importer of the yellow metal. In his Budget speech Finance Minister Pranab Mukherjee said India imported $40 billion worth of gold in 2011-12 despite a sharp rise in gold prices. This further widened India's trade deficit. The finance minister had imposed an import duty on gold and raised excise on unbranded jewellery in his budget.
(With inputs from Reuters)
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