The Reserve Bank of India (RBI) on Wednesday came out with comprehensive draft guidelines to harmonise and regulate gold loans across all financial entities, including putting a cap of 75 per cent on loan-to-value (LTV) ratio.
The draft guidelines also aim to address concerns related to certain lending practices, provide clarity on specific aspects, and strengthen the conduct-related standards in the sector.
In the draft circular, the RBI stated that norms for lending against gold collateral must be incorporated into the credit/risk management policy of lenders.
The policy should include appropriate single borrower limits, sectoral limits for the portfolio of loans against gold collateral, mechanisms to ensure proper end-use of funds, loan-to-value (LTV) ratio, valuation standards and norms, as well as standards for gold purity.
Additionally, the circular stated that lenders cannot not grant any advance against primary gold/ silver or financial assets backed by primary gold/ silver like units of exchange-traded funds (ETFs) or units of Mutual Funds.
Additionally, lenders shall not extend loans where ownership of the collateral is doubtful.
Also, lenders cannot extend loans against re-pledged gold collateral.
According to RBI, lenders are required to establish a ceiling on the loan portfolio secured by eligible gold collateral as a proportion of their total loans and advances.
This ceiling has to be periodically reviewed, taking into account factors such as desired granularity, collection efficiency, auction-based realisation performance, availability of adequate economic capital, and concentration risks.
Additionally, lenders have to set a ceiling on the quantum of loans to a single borrower against eligible gold collateral, differentiating between income-generating and consumption purposes.
This ceiling should be applied consistently and in a non-discriminatory manner, RBI said.
Further, RBI has said that loan-to-value ratio (LTV) of lending against gold collateral will be capped at 75 per cent on an on-going basis through the tenor for gold loans and for all gold loans sanctioned by NBFCs.
“The draft guidelines on gold loans provide improved clarity on the applicable LTV for the lenders.
"The cap in the LTV at 75 per cent on an on-going basis through the tenor for gold loans extended for consumption purposes and for the gold loans by NBFCs, could have some near-term impact on growth.
"The additional provision of 1 per cent in case of breach in LTV, should however be manageable for large NBFCs operating in this segment, considering their overall business yield and healthy earnings performance,” said AM Karthik, senior vice president & co-group head, Financial Sector Ratings, ICRA.
According to a private banker the proposed norms bring harmony and are advantageous for banks.
“Now, the NBFCs also have to ensure LTV during the entire tenure of the loan like the banks.
"Secondly, the maximum LTV in case of consumption loan shall not exceed 75 per cent whereas in case of income generating loans banks can go beyond the LTV which is advantageous for banks,” he said.
The RBI has also said that lenders may only renew or increase gold loans if there is no stress on existing loans and if the allowable loan-to-value ratio has some flexibility.
Moreover, the central bank clarified that a single gold collateral cannot back multiple loans at the same time and has asked lenders not to grant loans if the collateral has been re-pledged or if there are uncertainties regarding its ownership.
Lenders also have to implement a uniform procedure across all branches for assessing the weight and purity of the gold being used as collateral.
Additionally, they must regularly monitor the loan usage and maintain comprehensive documentation regarding how borrowers are utilising the funds provided.
Shares of gold loan NBFCs ended in the red on Wednesday.
At closing, shares of Muthoot Finance ended 7 per cent down; IIFL Finance was down 2.5 per cent while shares of Manappuram Finance closed 1.86 per cent down.
Key takeaways
- According to RBI’s circular, lenders can’t grant any advance against primary gold/silver or assets backed by primary gold/silver
- Lenders should not extend loans where ownership of the collateral is doubtful
- They should not give loans against re-pledged gold collateral
- The lenders are required to establish a ceiling on the loan portfolio, which needs to be periodically reviewed
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