The Reserve Bank of India has banned gold finance company Muthoot Fincorp from taking deposits from public, dealing yet another blow to the industry where regulatory attention is intensifying after blistering growth threatened system stability.

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, said the central bank in a statement.

"Acceptance of deposits from the public by Muthoot Estate Investments, which is a partnership firm, is prohibited," said the statement.

"Members of the public are hereby cautioned to note that acceptance of deposits by the company or Muthoot Estate Investments is punishable with imprisonment and those who deposit money with the company, or Muthoot Estate Investments, may do so at their own risk."

Finance companies lending against gold, though in business for centuries, are suddenly getting bigger with implications for millions of investors and borrowers if they fail. The high profitability had 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. So the central bank has been tightening regulations on them.

For non-banking finance companies engaged in lending against gold, the regulator has mandated a tier-I capital requirement of 12%. Also, the loan-tovalue ratio should not exceed 60% of loans granted against gold jewellery and these companies will have to disclose the ratio in their balance sheet, new RBI guidelines say.

Also, these companies cannot accept loans against bullion and gold coins. These moves have led to a plunge in the market value of Manappuram Finance, which was earlier banned from taking deposits, and Muthoot.

"The recent guidelines for the gold loan sector will significantly moderate the sector's growth and profitability over the next year," Crisil, a rating company, has said.

"Guidelines will have an overall positive impact on the sector over the long-term, as these will reduce regulatory uncertainties the sector has witnessed in the recent past and enhance stake holders' confidence."

These companies, which were growing at more than 80% annually, may see it fall by a third, said Crisil. To increase the accountability of these companies, RBI had issued fair practices code to be followed by them.

RBI has asked NBFCs to mention the penal interest rate and built in re-possession clause in the loan agreement. The shares of Muthoot Fincorp went up by 11% to Rs 131.95 while Manappuram closed 1.79% lower at Rs 30.15 on the BSE. (Economic Times)