RBI's Directive to Gold Loan Lenders:
The Reserve Bank of India (RBI) issued a directive to gold loan lenders to adhere strictly to regulatory norms.
This move aims to tighten control over Non-Banking Financial Companies (NBFCs).
Increased scrutiny followed findings of regulatory violations by certain NBFCs.
In March, RBI banned IIFL Finance from issuing new gold loans due to regulatory breaches.
RBI’s Gold Loan Norms
Loan-to-Value (LTV) Ratio:
Lenders cannot loan more than 75% of the gold's value submitted as collateral.
This is to provide a cushion to absorb potential losses from borrower defaults.
Cash Disbursement Limits:
Compliance with income tax rules mandates that no more than ₹20,000 of the loan can be disbursed in cash.
The remainder of the loan must be deposited into the borrower’s bank account.
Auction Process:
Auctions of gold (in case of borrower default) must be conducted fairly and transparently.
Auction locations must be accessible to borrowers.
Future Guidelines:
The RBI is believed to be developing detailed guidelines for gold loans.
Reason for Reinforcing Norms
Regulatory Violations:
Some NBFCs have been found violating gold loan regulations.
IIFL Finance was penalized for various infractions, including improper loan size and disbursal methods, inaccurate gold valuation, and irregular auction processes.
Aggressive Lending Practices:
NBFCs might overvalue gold to offer larger loans, aiming to rapidly expand their loan books.
This aggressive growth raises concerns about systemic risks as the gold loan industry expands.
Internal vs. External Assayers:
NBFCs use internal assayers to evaluate gold, unlike banks that use external assayers.
This practice raises concerns about the accuracy and reliability of gold valuations.
Rapid Growth of Gold Loan Portfolios:
NBFC gold loan portfolios have grown significantly since the pandemic, from ₹35,000 crore in FY 2020 to ₹1,31,000 crore in FY 2023.
The RBI is wary of the potential systemic risks from such rapid growth in gold loans.
Impact on NBFCs
Growth and Profitability:
Increased scrutiny and adherence to norms might hinder the growth and profitability of NBFCs.
Cash disbursement limits (max ₹20,000) could make NBFC gold loans less attractive.
Emergency Cash Services:
NBFCs pride themselves on providing quick emergency cash, especially to those outside the banking system.
Stricter enforcement of loan-to-value rules might reduce their ability to lend aggressively.
Temporary Pandemic Measures:
During the pandemic, RBI temporarily allowed loans up to 90% of the gold's value.
This measure enabled NBFCs to expand their loan books rapidly.
Increased Business Costs:
Transparent and accessible auction processes could increase operational costs for NBFCs.
This might lead to higher borrowing rates for lenders.
Sustainability and Systemic Risk:
The RBI believes that stricter lending norms will ensure the long-term sustainability of the gold loan business.
These measures aim to mitigate potential systemic risks as the industry grows.
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