The Business Bytes
New Delhi, October 22, 2024 (TBB Bureau): The Reserve Bank of India (RBI) has flagged certain irregularities in the gold loan segment and called upon lenders to thoroughly reassess their lending practices. The new regulatory measures, aimed at curbing discrepancies in the loan against gold jewellery sector, may slow the growth of gold loans in the near term.
In a recent circular, the RBI directed all supervised entities (SEs)—including commercial banks, small finance banks, urban co-operative banks, and non-banking financial companies (NBFCs)—to review their policies, processes, and practices. Key concerns raised include inadequacies in maintaining the loan-to-value (LTV) ratio, non-compliance with asset classification norms for overdue accounts, and insufficient monitoring of gold loan end-usage.
The circular was issued against the backdrop of a significant surge in gold loan portfolios across banks and NBFCs over recent quarters. Retail gold loans at banks rose by 37% between April and August 2024, while NBFCs recorded an 11% increase in assets under management in the first quarter of the fiscal year, driven by both rising gold prices and demand.
“The regulations aim to ensure consistent application of guidelines in the gold-loan space and protect borrower interest,” said Malvika Bhotika, Director, CRISIL Ratings. “Adherence is likely to impact disbursements over the next few quarters and taper gold loan growth for both banks and NBFCs.”
While the gold loan sector is expected to adapt, the immediate effect could include a slight uptick in loan delinquencies as entities revise their non-performing asset (NPA) recognition practices. Despite this, the gold loan business is largely supported by a low credit loss environment, thanks to the emotional and sentimental attachment Indian borrowers have to their gold. Lenders’ ability to maintain conservative LTV ratios, along with timely auctions, will also help mitigate losses.
The impact of the RBI’s extensive circular on the credit profiles of banks and NBFCs remains a key area for ongoing observation.
