Gold financier stocks came under intense selling pressure on Wednesday, with major players such as Muthoot Finance, IIFL Finance, Manappuram Finance, and Cholamandalam Investment and Finance Company tumbling as much as 10% at their intraday lows.
The sharp decline was triggered by an announcement from Reserve Bank of India Governor Sanjay Malhotra, who stated that the central bank would soon issue new guidelines on loans backed by gold. Malhotra made the comments during his post-policy speech, sparking widespread uncertainty among investors.
Gold loans comprise a significant portion of the loan books for many of these financiers. IIFL Finance has a 21% exposure to gold loans, while the figure is much higher for Manappuram and Muthoot Finance at 50% and 98%, respectively. This heavy dependence on gold-backed lending made these firms particularly sensitive to the RBI’s statement.
The impact of the announcement extended beyond NBFCs to banks with high exposure to gold loans. Federal Bank and CSB Bank shares also slipped in early trade. Federal Bank, where gold loans account for about 15% of its portfolio, managed to recover and close in the green. CSB Bank, with over 40% of its lending in gold loans, remained under pressure.
“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 RBI Governor said.
The initial lack of clarity around the scope and direction of these regulations triggered market jitters. However, investor concerns eased somewhat after the Governor clarified that there was no intent to tighten norms for gold loans. This reassurance helped gold financier stocks bounce back from their lows later in the session.
In a separate policy move, the RBI also delivered a quarter-point rate cut—the second consecutive cut—and shifted its monetary policy stance from ‘neutral’ to ‘accommodative.’ This signals the possibility of further rate reductions aimed at spurring domestic consumption amid a challenging global economic backdrop marked by trade tensions stemming from the U.S. tariff measures.
Meanwhile, gold prices have remained elevated as global investors seek the relative safety of the yellow metal. This combination of lower interest rates and strong gold prices is ultimately favorable for gold loan providers. Lower borrowing costs improve their margins and funding access, while rising gold prices enhance the value of their collateral, reducing credit risk and increasing lending capacity.
(Source)