RBI allows banks to lend up to 90% against gold; Muthoot, Manappuram slip up to 10% from day’s high

Shares of Muthoot Finance and Manappuram Finance cracked up to 10 per cent from day’s highs after clarity that the RBI allowed banks to lend up to 90 per cent of the gold ornaments value, up from the existing limit of 75 per cent.

The RBI hiked the loan-to-value ratio on gold loans to provide relief to borrowers looking to take gold loans to mitigate the urgent financial needs caused by the coronavirus pandemic.

“Loans sanctioned by banks against pledge of gold ornaments and jewellery for non-agricultural purposes should not exceed 75 per cent of the value of gold ornaments and jewellery,” RBI said.

It further added that with a view to further mitigate the economic impact of the Covid-19 pandemic on households, entrepreneurs and small businesses, it has been decided to increase the permissible loan to value ratio (LTV) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes from 75 per cent to 90 per cent. This relaxation shall be available till March 31, 2021.

Earlier, gold loan financers advanced up to 6 per cent in the afternoon trade after Governor Shaktikanta Das announced a relaxation on loan-to-value (LTV) ratio for gold loans. However, Muthoot Finance later closed 5.38 per cent down at Rs 1,189.75 on the BSE, while Manappuram Finance settled 2.79 per cent down at Rs 154.80.

Manappuram Finance shares traded nearly 4 per cent higher at Rs 165 after the announcement at 1 pm, while Muthoot Finance gained 2.66 per cent at 1,290.80. BSE benchmark Sensex was up nearly 1 per cent at 38,022.

G Chokkalingam, Founder, Equinomics Research and Advisory said, “RBI has taken a right step from the macroeconomic perspective. It is trying to create demand in the system.”

The 90 per cent of the loan against gold also increases the risk of gold financing players as the yellow metal is hovering at record high level. Any fall in gold prices will increase defaults. Therefore, investors should stay cautious on gold loan companies, he added.

In another development, Reserve Bank of India kept the repo rate unchanged at 4 per cent in view of the uncertain inflationary scenario. It also kept the reverse repo rate unchanged at 3.35 per cent while maintaining the accommodative stance in the latest monetary policy.

V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services said, “RBI answered the classic dilemma of “to cut or not to cut” with a clear no cut announcement. The pause in policy rates and accommodative stance reflects the central bank’s concern about inflation which it feels has risk on the upside.”