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India's Gold Loan Boom Gets Strict New Rules

Booming cash-for-gold lender Muthoot knocked as RBI fights "unbridled growth"...
WORLD No.1 gold consumer nation today got strict new rules for how companies making gold-backed loans to households should price and care for the jewelry which borrowers pledge.
This boom industry grew at 55% per year between 2008 and 2012, the Reserve Bank of India said in a report earlier this year. Top non-bank provider Muthoot has six million clients according to Bloomberg, and adds some 80,000 new borrowers every day.
But such "unbridled growth may not be in the overall interests of the concerned [lender] or the sector," the RBI said today, extending its recent run of gold-import and financing rules.
"There is a need for consolidation of the existing network."
Shares in Muthoot Finance fell more than 8% today, while the share price of top non-bank competitor Manappuram Finance lost 5%.
Manappuram now trades 80% below its peak of 2011, according to data from MoneyControl. Muthoot's stock has more than halved since peaking in January this year.
Each with more than 3,000 branches across India, both companies are well in excess of a new 1,000-branch rule set by today's RBI notification, and must seek prior approval before opening any new outlets.
To standardise loan valuations, all gold jewelry accepted as collateral must also be valued at the Bombay Bullion Association's closing gold price for 22-carat metal over the last 30 days. Lower carat items are to be valued proportionate to that benchmark.
The Reserve Bank's other new gold loan rules concern secure storage, checking the ownership of pledged gold, and taking the personal tax number of higher-value borrowers.
Gold lenders also got new rules about how to price gold sold when the owner fails to repay their loan.
Auctions must be held in the same town as the branch where the gold was first pledged. A reserve price must be set at not less than 85% of the BBA's last 30 days' average.
After forecasting during April's gold price crash that the drop would not affects its business, Muthoot said last week that its gold holdings had returned to spring 2012's peak levels.
Muthoot's latest financial statements showed it held some 137 tonnes of gold at end-June. Worth some $5.25 billion at then-market prices, it was pledged against $4.02bn of loans (254 billion Rupees) – a loan-to-value ratio of 76% across the business at market values.
Today's RBI notification repeated the 60% LTV limit on new loans first set in April 2012.

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