AOJ E-NEWS India's gold-loan companies are headed for subdued business after the central bank reduced to a fifth the upper limit on cash non-banking finance companies (NBFC) could advance to borrowers, temporarily brightening the prospects of unorganised pawnbrokers of jewellery.

They recovered during the day, with Muthoot Finance closing 3.85% lower at Rs 338 and Manappuram Finance closing 4.54% lower at Rs 90.50. The Reserve Bank of India (RBI) has now set the limit at Rs 20,000 against the earlier cap of Rs 100,000.

Some of the business may move to the unorganised sector in the short term, but in the long run, it wouldn't affect our company much as people will get used to less-cash transactions," said George Muthoot, Director, Muthoot Fincorp.

"As a part of the Association of Gold Loan Companies, we intend to appeal to the RBI to review the guideline and provide more time for its implementation so people are mentally prepared."

The central bank guideline comes four months after India announced a currency swap on November 8, with 500 and 1,000 rupee bills ceasing to be legal tenders overnight. Sincethen, the government has announced a raft of measures to enhance digital modes of payment in the country, where 98% of consumer transactions had been cash-based.
Analysts said loan disbursements for companies would fall in the coming months as advances at lenders such as Muthoot and Manappuram are largely below Rs 1 lakh: The average loan size rangesfrom Rs 30,000 to Rs 40,000. "There will be an impact on the gold loan companies in the shortterm as 30-35% of the gold loans are now disbursed in cash and only about 15% of the loans are below Rs 20,000," said Paras Bothra, head of research, Ashika Stock Broking.

However, their long term outlook is intact as this impact will not take more than two to three quarters toplay out." Both Muthoot and Manappuram are switching to non-cash transactions. After the November 8 demonetisation, Manappuram's transactions through banking channels increased to 75% from 55% in one quarter, said analysts.

Banks could also be beneficiaries of this rule as they could capture a part of the NBFC gold-loan business, said AK Prabhakar, head of research at IDBI Capital Markets. "There will be some migration of NBFC clients to banks, which will also offer good interest."

Courtesy: ET