Gold financier stocks reeled under selling pressure on Wednesday with prominent names like Muthoot Finance, IIFL Finance, Manappuram Finance, Cholamandalam Investment and Fin Co crashing up to 10% at the day’s lows.
The sharp selloff in these counters was triggered by Reserve Bank of India Governor Sanjay Malhotra’s announcement that the central bank was planning to soon issue guidelines on loans against gold. Malhotra made the announcement as part of his post-policy speech.
Gold loans makes up 21% of the total portfolio for IIFL Finance while its contribution for Manappuram and Muthoot Finance stands much higher, at 50% and 98%, respectively.
Aside from these gold financing companies, shares of Federal Bank and CSB Bank also came under pressure due to their high exposure to gold loans. Later on though, Federal Bank shares recouped losses and jumped back into the green territory.
For Federal Bank, gold loans make up nearly 15% of its total portfolio and for CSB Bank, the share stands at more than 40%.
“Loans against the collateral of gold jewellery and ornaments, commonly known as gold loans, are extended by regulated entities for both consumption and income-generation purposes. In order to harmonise guidelines across various types of regulated entities, to the extent possible, keeping in view their differential risk bearing capabilities, we shall issue comprehensive regulations on prudential norms and conduct related aspects for such loans,” the Governor said.
Following the announcement, jitters spread across on the back of uncertainty over the policy changes that the guidelines might initiate. However, the governor was quick to clarify that his announcement never intended that the central bank will tighten norms on loans against gold.
The clarification seemed to ease some investor nerves as shares of gold financiers soon came sharply off their day’s lows.
Meanwhile, the RBI also delivered a quarter-sized rate cut today, a second in a row and changed its monetary policy stance from ‘neutral’ to ‘accommodative.’ The change in stance also hints at the scope of more rate cuts ahead as the central bank attempts to boost sluggish consumption at a time when the global economy is in doldrums amid Trump’s tariff offensive.
Gold prices have also been on a high as investors flock to the safe haven to get respite from the uncertainty hanging over the global economy. Meanwhile, the culmination of lower interest rates and high gold prices bode well for gold financiers. Lower rates reduce the cost of borrowing for these companies whilst also boosting demand, whereas high gold prices lifts the value of their asset holdings.
