March 31st, 2012
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RBI bans Muthoot Fincorp from raising deposits

muthootMumbai: The Reserve Bank of India (RBI) today prohibited Muthoot Estate Investments, a partnership firm of Kerala-based gold finance company Muthoot Fincorp, from collecting deposits from the public. The apex bank said taking of deposits at the branches of Muthoot Fincorp, that lends money against gold via Muthoot Estate Investments is a violation of law.

“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,” RBI added.

Muthoot Fincorp, a Kerala-based non-deposit taking and non-banking financial company (NBFC). It has partnered with its arm Muthoot Estate Investments. Muthoot Estate Investments, in which the promoters of Muthoot Fincorp are partners, has collected and has been collecting deposits in the form of fixed deposits, cumulative deposits and special public deposits from the public.

RBI is intensifying regulatory attention to harness and control the blistering growth of the industry that threatens system stability. 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.

These companies, which were growing at more than 80% annually, may see it fall by a third, said Crisil, a rating company. To increase the accountability of these companies, RBI had issued fair practices code to be followed by them. The recent guidelines for the gold loan sector will significantly moderate the sector’s growth and profitability over the next year.


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