Don't obsess over gold — RBI officials earlier and P Chidambaram on Friday advised Indians. And a few months ago, RBI had reduced lending capacity of gold loan non-banking financial companies (NBFCs) — from 70% of the value of gold pledged by borrowers to 60%.

But what the government and regulators propose often does not work. Gold loan NBFCs have found an ingenious way to bypass strict lending rules imposed on them. And what gold NBFCs may lose by way of business will be taken up by banks and local money lenders.

After the Reserve Bank's new rule, NBFCs changed the way gold is valued to include making charges and also tax. This is how it used to work: if the gold content in a piece of jewellery is valued at Rs 100, a loan of Rs 70 was typically possible. Now, to the Rs 100 are added making charges (say, about Rs 10) and the VAT (12%). So, the loan is given on the replacement cost of the jewellery — Rs 123 (Rs 100 + Rs 10 + Rs 13). And 60% of Rs 123 is greater than 70% of Rs 100; so the new norm doesn't look bad.

If the gold loan NBFCs did not pad up the value of the gold, growth would have fallen to 5-10%, according to a report by ICRA Management Consulting Services, or IMaCs. It estimates that by taking into account the making charges and other taxes, growth will be 18-20% — still lower than the 22-26% clocked before the new regulations.

"Yes, including making charges has offset the impact to some extent," says Munish Dayal, a partner at Baring Private Equity Partners India, which is an investor in Muthoot FinanceBSE 0.88 % and Manappuram FinanceBSE 3.57 % — the two most aggressive players in the gold loan sector.

But Muthoot denies the value of gold being pledged is being pushed up by adding other costs. "The RBI circular is clear to us. We are not adding making charges; it is still based on the value of the jewellery. Interpretation could be different," says Oommen Mammen, chief financial officer of Muthoot Finance, which has a 20% market share of the organised gold loan market in the country.

Manappuram, the other big gold loan NBFC with a market share of about 10%, declined to comment for the report. In 2012, the organised gold loan market in India was worth Rs 1.25 lakh crore, of which the gold loan NBFCs had a share of about 46%, according to IMaCs. Baring's Dayal is convinced the measures brought by RBI will hurt gold finance companies. Their impact, he points out, is already visible.

Keywords:gold , RBI officials ,P Chidambaram, gold loan ,NBFCs, Reserve Bank, taxes, Muthoot Finance,BSE , Oommen Mammen, chief financial officer ,Muthoot Finance,gold loan market ,business news