RBI draft norms may hit gold loan asset growth of NBFCs: Crisil Ratings

The Reserve Bank of India's draft guidelines on gold loans are likely to slow down asset growth for non-banking financial companies (NBFCs) engaged in this segment, Crisil Ratings said on Tuesday.

The draft was released in April with an intent to harmonise regulations across financial entities and address disparities in lending practices.

However, the provisions related to loan-to-value (LTV) ratios and bullet loan renewals may pose headwinds for gold loan-focused NBFCs if implemented in their current form, according to the report.

The RBI’s draft comes after the regulator flagged concerns in September 2024 about irregular practices amid a sharp surge in loans against gold jewellery. It had asked lenders to comprehensively review their policies, processes and practices to identify gaps and initiate remedial measures in a time-bound manner.

The overall gold loan portfolio of banks and NBFCs grew by over 50% in the last fiscal, with bank-originated gold loans alone more than doubling.

Under the new norms, LTV ratios must be maintained at or below 75% throughout the loan tenure, and for bullet repayment loans, the LTV must factor in the total repayable amount, including accrued interest, rather than just the principal.

“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,” said Malvika Bhotika, Director, Crisil Ratings.

She added that LTVs at disbursal may have to be cut from the current 65-68% to 55-60%.

"This will mean lower loan disbursement for the same value of gold jewellery," Bhotika said.

NBFCs may also be prompted to shift towards EMI-based products or collect interest periodically to ensure compliance with the new rules.

The guidelines also propose a 1% standard asset provisioning if the LTV limit is breached continuously for 30 days, higher than the current norms but not expected to materially dent profitability during the transition.

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, the agency said.

The RBI has also proposed stricter norms around loan tenure, valuation of gold, auction procedures, and use of cash in disbursements and repayments.

While the transition may cause short-term disruption, the proposed changes are expected to structurally strengthen the gold loan segment in the long term, Crisil said.