RBI MOVE ON GOLD LOANS MAY HIT PRIVATE BANKS, NBFCS

The last quarter before the closure of financial year, private banks are busy buying loans from non-banking finance companies to meet their 40 per cent priority sector lending target set by the banking regulator. By selling these loans to banks, NBFCs are able to mobilise resources at a more competitive rate than those prevailing in the market.

The Reserve Bank of India on Friday said that banks cannot show loans given against gold jewellery bought from NBFCs under priority sector lending. This news comes as a thunderbolt for both private banks and NBFCs specialising in loans against gold.

Impact greater on private banks

The move by the RBI is due to the high interest rate charged on these loans – 18 to 24 per cent – and that end-use of the funds [got from banks] by the NBFC may not be for priority sector lending. These loans against gold jewellery are called ‘bridge loans' as they are for a short duration of three months and usually taken by small traders and businessmen. The loans given in rural areas would typically fit into the priority sector lending.

Mr S.K. Mishra, General Manager (priority sector), Indian Overseas Bank, said the impact would be greater on private banks compared with public sector banks. Public sector banks have a large network of branches in rural areas and, therefore, easier to meet the priority sector lending.

The 40 per cent on priority sector lending is determined by the previous year's total advances given by banks. Although there is time from April to December, banks wait till January to March to buy these loans as the margins are less on loans.

The rate would depend on the desperation of banks to buy and the bargaining capacity of NBFCs. This year, the determining factor would be the base rate, not Prime Lending Rate (PLR), like earlier.

Earlier, banks could lend less than the PLR but with base rate in vogue, banks cannot lend less than the base rate.

Banks that are likely to be impacted are ICICI Bank, HDFC Bank, IDBI Bank, YES Bank, ING Vysya Bank and Axis Bank.

In an earlier interaction with Business Line, Mr George Alexander Muthoot, Managing Director, Muthoot Finance, said that the advantage of selling these loans to banks is that they can mobilise funds at cheaper rate. Muthoot Finance is a big player in this segment. It had a total loan book of Rs 7,342 crore as on March 31, 2010.

---

LOSING SHINE

  Banks cannotshow loan given against gold jewellery bought from NBFCs under priority sector lending.

  Private banksbuy these loans to meet their priority sector lending target.

  Public sectorbanks may fare better as they have a large network in rural areas.

  For NBFCs,the advantage of selling these loans to banks is that they can mobilise funds at cheaper rate.

SOURCE: http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article1165824.ece