Lenders will have to revisit policies and processes to ensure compliance
FinTech BizNews Service
Mumbai, 22 October, 2024: The Reserve Bank of India (RBI) recently 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 timebound manner.
Potentially, this could impact gold loan disbursements during the transition phase and curb growth in the business.
The circular is addressed to the supervised entities (SEs) of the RBI — all commercial banks, including small finance
banks, primary (urban) co-operative banks and non-banking financial companies (NBFCs).
Some areas highlighted in the circular pertain to deficiencies in the monitoring of 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
(refer to annexure for detailed list of observations and their potential impact), among others.
The circular comes in 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 ~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%2 (non-annualised).
Says Malvika Bhotika, Director, 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, 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, in the gold loan business, credit cost is the more appropriate indicator of asset quality and overall credit
losses are seen 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.
Issues highlighted by the regulator and their potential impact:
I LTV monitoring (both at disbursal and thereafter)
• Potential impact on reported NPAs and profitability; limited impact on ultimate losses:
In cases of LTV breach and if customers fail to replenish margins within stipulated timelines, entities will have to recognise such customers in ‘overdue or NPA’ category. Any potential increase in delinquencies will
attract higher provisioning requirements, which can affect profitability in the interim. However, ultimate losses are likely to be limited as entities have been able to manage delinquent accounts by conducting timely
auctions.
II End-use verification for non-agriculture loans and documentation for agricultural gold loans
• Potential impact on priority sector lending (PSL) compliance:
To keep availing of the benefit under ‘PSL’, banks will need to maintain
sufficient evidence of end-use being towards agricultural purposes.
III Process of offering of loans to existing customers
• Potential impact on business growth:
Given high operational convenience, most lenders follow standard practice of offering loans to existing customers. Any changes in this practice can have an impact on business growth.
IV Cash disbursals for loans above Rs 20,000
• Limited or negligible impact on business growth:
Following a regulatory directive in May 2024, NBFCs have transitioned to
digital channels for disbursements. This has been made possible due to their existing infrastructure and technology, which already supported online disbursements for larger loan amounts, as well as educating borrowers to use digital modes. Most of the NBFCs have demonstrated the ability to adapt to this change in a reasonably quick timeframe, thereby not having any major impact on business growth.
V NPA recognition norms
• Potential impact on asset quality; limited impact on ultimate losses:
Any change in asset classification norms can lead to an increase in reported delinquency levels (both overdues and NPAs). However, conducting auctions in a timely manner will offset this impact from the perspective of ultimate credit losses.
VI Process followed in case of third-party involvement in sourcing and appraisal of loans
• Potential impact on growth due to higher operational intensity:
Entities wherein reliance on partnership model is high, lenders may have to reassess business sourcing as well as audit policies. This may increase the operational intensity and thereby lead to a slowdown in business growth.
