On February 2, Manappuram Finance, India's second largest gold-loan company, reported impressive numbers for the December quarter. Four days later, its investors were in for a shock, as the Reserve Bank of India (RBI) issued a sternly worded letter ordering the company not to accept or renew public deposits.
In fact, no gold loan company can, because they have all opted to function as non-deposittaking non-banking finance companies. To meet working capital needs, they tap banks, financial institutions and individuals. RBI cracked down after it emerged that some offices of Manappuram Finance, a listed company, doubled as offices of Manappuram Agro Farms, a proprietary firm of Executive Chairman V.P. Nandakumar, and accepted public deposits.
"In my view, there is nothing illegal about Manappuram Agro Farms accepting deposits but the regulator viewed it otherwise. So, we are refunding the deposits," says Nandakumar, adding that there are no public deposits on the books of Manappuram Finance.
The Manappuram Chairman admits that the RBI inspection report contains some valid corporate governance issues
, which he has now set out to correct. He intends to do so by keeping the two Manappuram entities distinct, separating offices, personnel and equipment. All the leading gold-loan firms - Muthoot Finance
, Manappuram Finance and Muthoot Fincorp - are headquartered in Kerala but have a national footprint.
In the third quarter ended December, Manappuram Finance reported that its net profit rose 117 per cent to Rs 161 crore. During the period, it opened 235 branches - almost four branches a working day - taking its total to 2,738. "The RBI advice will not affect growth but it has affected our credibility. It will take a long time for us to come out of this," says Nandakumar. Between February 2 and February 9, the Manappuram scrip declined 12 per cent to Rs 47.05.
Nandakumar says holder s of Manappuram's debentures and bonds have remained with the company. "We are not going in for any capital raising for another two years. We are very well-capitalised. Our Tier 1 capital alone is 18 per cent, as against the 12 per cent capital-to-risk asset requirement laid down by the regulator." Gold-loan companies offer between 60 per cent to 90 per cent of the value of jewellery to borrowers, at rates ranging between 12 and 24 per cent a year.
Interest rates are higher for loans closer to the jewellery's market value. Muthoot Finance Managing Director M .G. Alexander Muthoot says his company's gold-loan business has been unaffected as the RBI advice was specific to Manappuram.
According to a Mumbai-based analyst, Manappuram Agro Farms has accepted deposits to the tune of about Rs 12 lakh from the premises of Manappuram Finance. This is a violation, according to the RBI. Manappuram Finance itself has not accepted any deposits from the public, the analyst notes. The RBI advice, he adds, will not have any direct impact on the operations of Manappuram's gold business or on the gold-loan sector. But sentiment-wise, the development will have an impact and raise doubts about corporate governance in gold loan companies.