Reacting to the Reserve Bank of India's notification that loans given against jewellery as collateral would no longer be eligible for priority sector lending, shares of Manappuram General Finance & Leasing fell 6% to Rs 108 on Thursday. Investors feared the loan-against-gold-jewellery firm's cost of borrowing may rise and hurt profitability. Loans to priority sectors such as agriculture, education, low-cost housing, and those given to weaker sections of the society offer lower interest rates.
But Manappuram chairman and managing director VP Nandakumar says the RBI move will not have a significant impact on his company’s profitability. “Of our total loan book of around Rs 7000 crore, around Rs 3200 crore is funded through priority sector lending from banks,” Mr Nandakumar told moneycontrol.com. He said the cost of priority sector loans was 10.5%. The borrowing cost for this portion of the loan book would go up by 0.75%, he said. In addition, the company had the option to raise around Rs 1600 crore through commercial papers, which it would be able to do at 11%. So the net impact of higher borrowing costs on the loan book as a whole would be around 0.34%.
Manappuram charges as much as 22-23% on the loans it issues against gold jewellery. The interest rate varies anywhere between 12% and 23%, depending on the quantum of the loan compared to the value of the gold jewellery pledged. So a person borrowing up to 80% — the highest limit—of the value of the jewellery will have to pay peak rates, compared to somebody who is borrowing just 40% of the value.
“But since these are mostly short term loans, most people borrow the maximum amount,” Mr Nandakumar. Banks are eager to lend to non-banking finance companies like Manappuram, which then issue loans to individuals against gold jewellery. This is because such loans are not only secured, but also yield good returns, and help banks meeting their priority sector lending target of 40% of the total loan book.a
But Manappuram chairman and managing director VP Nandakumar says the RBI move will not have a significant impact on his company’s profitability. “Of our total loan book of around Rs 7000 crore, around Rs 3200 crore is funded through priority sector lending from banks,” Mr Nandakumar told moneycontrol.com. He said the cost of priority sector loans was 10.5%. The borrowing cost for this portion of the loan book would go up by 0.75%, he said. In addition, the company had the option to raise around Rs 1600 crore through commercial papers, which it would be able to do at 11%. So the net impact of higher borrowing costs on the loan book as a whole would be around 0.34%.
Manappuram charges as much as 22-23% on the loans it issues against gold jewellery. The interest rate varies anywhere between 12% and 23%, depending on the quantum of the loan compared to the value of the gold jewellery pledged. So a person borrowing up to 80% — the highest limit—of the value of the jewellery will have to pay peak rates, compared to somebody who is borrowing just 40% of the value.
“But since these are mostly short term loans, most people borrow the maximum amount,” Mr Nandakumar. Banks are eager to lend to non-banking finance companies like Manappuram, which then issue loans to individuals against gold jewellery. This is because such loans are not only secured, but also yield good returns, and help banks meeting their priority sector lending target of 40% of the total loan book.a
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