Reserve Bank of India (RBI) alerting gold finance companies with caution against beaching the Rs  20,000 cash loan disbursal has put heavy selling pressure on gold financing companies like  Manappuram Finance and Muthoot Finance. Many gold finance companies reported a drop in shares  as of May 9. In addition, Muthoot Finance shares also crashed up to 8.8% while Manappuram Finance  tumbled 8.3 percent. 

The non-bank financed companies (NBFC) will need to make operational changes leading to  momentary financial impact according to reports as stated by global brokerage Morgan Stanely. At the  end of December 2023, Gold loans were about 84% of Muthoot Finance’s AUM (Asset Under  Management) and 51 % of Manappuram Finance. Manappuram Finance is projected to have better  stock in comparison to Muthoot Finance in the near years due to 40% of the disbursement in cash.  

The NBFC’s gold loan asset under management was about 31% of its total assets under Management.  According to RBI Data, the gold loan share in the total loan of NBFC was 59.7%, around 2% less than last year. However, NBFCs remain the top provider of gold loans besides banks. This March RBI also  prohibited IIFL Finance (a non-banking finance company) from sanctioning gold loans to protect the  interest of customers. While issuing the advisory CBI mentioned that no individual can receive more  than Rs 20,000 as loan amount in cash. The IIFL management mentioned that the majority of concerns  revolve around the operational nature, not the outcome of any unethical practices by the company.  

This sudden drop has shocked everyone knowing that last year Muthoot Finance, one of India’s largest  gold-loan NBFC reported a 14% jump in standalone net profit at Rs 1,027 crore. In the same quarter  last year, the total amount of loans given out by Manappuram Finance was Rs 57,731 crore. This year,  it increased by 23% to reach Rs 71,182 crore with a profit that went up by around 46% to $69 million this quarter. Manappuram’s total assets under AUM as of December 31st were Rs 40,400 crore. This  went up from Rs 39,000 crore in the previous quarter. The increase was mostly because of  microfinance and vehicle financing.

Conclusion: 

Muthoot Finance and Manappuram Finance reported a drop in shares up to 9 percent. The cause is  said to be the Reserve Bank of India’s caution against exceeding Rs 20,000 in cash loan disbursal. This  announcement caused heavy selling pressure on gold financing companies. Reportedly, Muthoot  Finance shares dropped by 8.8% and Manappuram Finance tumbled by 8.3%.

The central bank’s  reminder about cash loan limits will require non-bank financed companies (NBFCs) to make  operational changes, leading to momentary financial impact. While Muthoot Finance heavily relies on  gold loans, Manappuram Finance’s diverse disbursement methods may give it an edge in the future.  Despite the share drop, both companies have shown significant growth in loans and profits, indicating  their resilience in the market.