Regulatory Streamlining of Lending Set To Curb Gold Loan Growth: Report

Moneylife Digital Team 23 October 2024

Economy & Nation

Regulatory streamlining of lending by the Reserve Bank of India (RBI) will impact gold loan disbursements during the transition phase and curb growth in the business, says a research note. Recently, RBI flagged certain irregular practices in the loan against gold jewellery space and asked lenders to comprehensively review their policies, processes and practices to identify gaps and initiate remedial measures in a timely manner.

The circular is addressed to the supervised entities (SEs) of the RBI—all commercial banks, including small finance banks, primary (urban) cooperative banks and non-banking financial companies (NBFCs).

Some areas highlighted in the RBI circular pertain to deficiencies in monitoring the loan-to-value (LTV) ratio, asset classification norms for overdue loan accounts and inadequate due diligence in monitoring the end-use of gold loans, among others.

In the report, CRISIL Ratings says the circular comes against the backdrop of high growth in the gold loan portfolio of both banks and NBFCs over the past few quarters. "Retail loans against gold jewellery of banks increased about 37% (non-annualised) between April 2024 and August 2024 even as gold prices rose. For gold-loan focused NBFCs, growth in assets under management in the first quarter of this fiscal was 11% on a non-annualised basis."

According to Malvika Bhotika, director of CRISIL Ratings, the regulations aim to ensure consistent application of guidelines in the gold-loan space and protect borrower interest. "Adherence is likely to impact disbursements over the next few quarters and taper gold loan growth both for banks and NBFCs. That said, NBFCs are expected to adapt to the regulatory measures impacting their business within a reasonable timeframe, just as in the recent past, when limits were placed on cash disbursals."

However, CRISIL says, reported loan delinquencies may see some uptick as entities revisit their current non-performing asset (NPA) recognition norms and/ or policies and procedures for disbursing loans to existing customers.

Nevertheless, the report says that in the gold loan business, credit cost is the more appropriate indicator of asset quality, and overall credit losses are seen as being under control. "This is because of the strong, sentimental attachment that Indian borrowers have for their gold assets, which makes them relatively keener to get them back by repaying loans. The ability of lenders to maintain conservative LTV as well as to conduct timely auctions and recover dues also supports low ultimate credit losses."

"Overall, the issues highlighted in the RBI circular are quite extensive and therefore, any impact on the credit profiles of rated entities will be monitorable," the report says.