RBI Cautions Muthoot Fincorp Against Accepting Public Deposits

After cautioning the Kerala-based gold loans company, Manappuram Finance (MFL), last month against accepting/renewing any public deposits or using its premises for conducting business on behalf of a sole proprietary company owned by its Executive Chairman, the RBI has now cracked the whip on Muthoot Fincorp (MFCL).

According to a press release, it has come to the notice of the central bank that a partnership firm named Muthoot Estate Investments (MEIL), in which the promoters of MFCL are partners, has been collecting deposits from the public using the premises and branches of MFCL. As per Section 45-S of the RBI Act, this is in strong violation of the set guidelines, and is strictly prohibited.

Consequently, the RBI has cautioned the members of the public to refrain from depositing money with MEIL. The central bank has also warned MFCL, directing it to stop allowing the use of its premises and branches in any manner by MEIL for its personal activities, as doing so would call for severe punishment amounting to imprisonment.

The shares of MFCL’s group company, Muthoot Capital Services (MCSL), which is listed on the BSE, are currently trading down by 3.5% or 2.4 points at Rs 65.80 per share.

In recent times, it has been noted that the banking regulator has cracked down hard on the gold loans based Non-banking Financial Companies (NBFCs). Just a few days ago, on the basis of its observations of increased dependence of the gold loans companies on public funds, the RBI directed them not to exceed the Loan To Value (LTV) ratio of 60 per cent for loans against gold assets. The apex bank also directed them to disclose the percentage of such loans to their total assets in their balance sheet. Besides, NBFCs engaged in lending against gold jewellery have to maintain Tier I capital of 12% by April 1, 2014. They have also also been asked not to lend against bullion/primary gold and gold coins.

In light of all these woes and developments, business will remain challenging going ahead for companies like MFL, MFCL and Muthoot Finance. After the high growth that has been achieved in the past, these regulations would now sharply bring down their revenues. It is also expected that the net interest margins (NIM) and profitability would come under severe strain.

Given these probabilities we continue to maintain our previous stance that investors should not buy these stocks.