Banks, (though not all - but most of them) are considered to be most trusted entities for parking funds. Right since childhood we have been infused with the habit of saving regularly (in a piggy bank) and thereafter encouraged to open a bank account with the money so accumulated. But as the financial markets have evolved worldwide, there have been sea changes in the form and structure of financial products making them more difficult and complex to understand. Investors too, most of the times get lured into the fancy names of products and land up making bad investment decisions. There have been many cases of investors' money being put to risk or investors having been duped of their investments.

However, our country's central bank has been quite vigilant, and has quite often, taken bold steps to uphold investors' interests'.

Once again displaying its vigilant role, the Reserve Bank of India (RBI) has pulled up gold finance company - Muthoot Fincorp from taking deposits from the public. The lender of money against gold has been, through an associate firm Muthoot Estate Investments, taking deposits at the branches of the registered finance company, which is a violation of law, according to the RBI.

It is noteworthy that finance companies which are in business (of lending against gold) for centuries are suddenly getting bigger due to a potential market for the same. The high profitability has drawn many investors, including private equity funds, which has led to unbridled growth. These companies borrow funds from banks, and even sell bonds publicly to lend. Hence, the central bank has been tightening regulations on them.

Impact on the investors...
With the RBIs directive in place, the risk associated with the deposits collected by an arm of a Non-Banking Finance Companies (NBFCs) is set to reduce. In other words investors' money will be safeguarded post RBIs directive. Deposits collected by such companies (NBFCs or their arms) pose greater risks of default as the public deposits are used to lend money to borrowers against collateral. And if the asset (given as collateral) undergoes sharp price correction, then the company is left with nothing to repay the deposits of the public.

 

Our view:

In our opinion the Reserve Bank of India's (RBIs) decision to restrict Muthoot Fincorp (through its associate firm Muthoot Estate Investments) from taking public deposits is in the best interests' of the investors. RBI is concerned about the end use of the public deposits and the blistering growth of the 'loan against gold' business. Though there is nothing wrong in the business model of companies lending against gold; the main worry comes on the back of high loan-to-value ratio. A high loan-to-value ratio may cripple the operations of the companies in the event of the underlying asset class ‘gold' losing its value.

We believe that investors should be careful and exercise their due diligence while investing their hard earned money in any investment avenue.

 

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dtgavadi@yahoo.com Apr 06, 2012 RBI has done the right thing in controlling the flow of money into risky organization.  In tune with it you, PersonalFN, as advised your readers of the same and highlighting the impacts of the move by RBI.  Keep up your good work.
kland@csir.co.za May 10, 2012 that collectively those rigidity to beat the market just match the market before fees. After all fees, commissions, etc., they lag the market.Most people would do well to get advice from a good fee-only advisory. Unfortunately, most people can't distinguish between a good advisory and the thundering herd of mutual fund salespeople. Anyone who can make this distinction can probably just pick his or her own indexes without help.

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