Muthoot Finance shares took a major hit on Friday, plunging over 8% in early trade to Rs 1,964.35, following the RBI’s announcement of tighter rules for gold-backed loans—a move that's rattled investors and sent ripples across the gold loan sector.
What Triggered the Sell-off?
The RBI’s new regulatory framework for gold loans, unveiled in the latest monetary policy update, is designed to standardize lending rules across banks and NBFCs, including gold-focused players like Muthoot Finance. Given that 98% of Muthoot’s Assets Under Management (AUM) are tied to gold loans, any restrictions on such lending directly impact its core business.
Key RBI Proposals Affecting Gold Loan NBFCs:
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A uniform Loan-to-Value (LTV) ratio of 75% across all lenders.
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Bullet repayment loans must also strictly follow the 75% LTV rule on total maturity amount.
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If LTV violations persist beyond 30 days, a 1% additional provision must be made.
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Loan renewals won’t be allowed if the LTV limit is breached at maturity.
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Loans for income-generation must be monitored and tracked to ensure appropriate usage.
These regulations are seen as tightening the leash on practices that gold loan NBFCs commonly use to attract customers—particularly high-value or flexible repayment options.
Market Reaction and Impact:
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Muthoot Finance: Down 14% in the last five sessions and 7% over the past month despite a strong 1-year gain of 21.77% and a 5-year return of 176%.
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Manappuram Finance: Also came under pressure; it has ~50% AUM in gold loans.
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IIFL Finance: With 21% AUM in gold-backed loans, it too saw a dip earlier this week.
Why Investors Are Worried:
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The LTV cap limits revenue potential, especially from bullet repayment schemes, which are a popular offering.
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Operational flexibility for lenders is reduced — companies now need stricter loan tracking and more robust compliance systems.
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Additional provisioning for LTV breaches adds to costs, potentially denting profits.
Longer-Term Perspective:
While the regulatory intent is stability and uniformity, it challenges business models that have thrived on speed, flexibility, and higher risk-reward dynamics in gold lending. Muthoot and its peers may need to rethink their strategy, diversify their loan books, or invest more in compliance mechanisms.
Would you like a breakdown of how these rules could affect Muthoot's revenue or lending volumes over the next few quarters? Or perhaps a comparison of how these firms rank in gold loan exposure and adaptability?
