Mumbai : The Reserve Bank of India’s (RBI)’s draft guidelines on loans against gold collateral if implemented in the current form could slowdown the growth of non-banking financial companies (NBFCs) focused on gold loans.
The draft directions released by the RBI in April this year aim to harmonise the regulatory framework across regulated entities and address differences in lending practices. However, the directions, pertaining to loan to value (LTV) and renewal /top-up of bullet loans, if implemented in their current form, can slow down the loan growth of non-banking financial companies (NBFCs) focused on gold loans Crisil Ltd said in a report on Tuesday.
In terms of LTV, the draft directions ask for a ceiling of 75 per cent to be maintained through the loan tenure. More importantly, the LTV computation for bullet repayment needs to factor in the total amount repayable by the borrower at maturity, including accrued interest, rather than just the initial disbursed principal amount. Moreover, if LTV is breached for a continuous 30 days, the lender has to make an additional one per cent standard asset provisioning.
For bullet loans, the rating agency expects the LTV at disbursement to reduce from 65-68 per cent currently to 55- 60 per cent to factor in accrued interest and ensure LTV compliance.
Says Malvika Bhotika, Director, Crisil Ratings, “If implemented in current form, the directions on LTV computation and breaches thereof can impact the growth prospects of gold-loan NBFCs as they will have to recalibrate their disbursement values.”
“This will mean lower loan disbursement for the same value of gold jewellery. NBFCs may also look at periodic interest collection from their customers to manage LTVs. Alternatively, they may decide to focus on EMI-based products,” added Bhotika.
Another important direction is on the process for loan renewal and/or top-up. Renewals of, or top-ups on, bullet repayment loans can be extended only after the repayment of the entire accrued interest. This will reduce the flexibility of borrowers and curtail the ability of NBFCs to renew/top-up loans seamlessly.
For the record, last fiscal, the combined loans against gold jewellery portfolio of banks and NBFCs is estimated to have grown by over 50 per cent; for banks alone, the business more than doubled, growing around 104 per cent.
The draft directions come in the backdrop of the RBI, in September 2024, highlighting irregular practices amid a significant increase in the loan-against-gold jewellery portfolio of some lenders. It had asked lenders to comprehensively review their policies, processes and practices to identify gaps and initiate remedial measures in a timebound manner.
As lenders re-orient their processes to comply with the revised regulations, expect some hiccups like in the past when implementing similar guidelines. That said, the directions are expected to structurally strengthen the sector over time. Further, ultimate losses are also likely to be in line with past trends due to strong risk management practices and timely auctions.
The impact on the credit profiles of rated entities based on the final directions will bear watching said Crisil Ltd.
