FIDC seeks parity for gold loan NBFCs with banks on loan-to-value ratio

By limiting applicability to banks, a vulnerable section of the population is punished by exclusion, the Council says

The Finance Industry Development Council (FIDC) in a letter to the Reserve Bank of India (RBI) governor has asked the regulator to reconsider its decision on keeping out the gold loan-focused NBFCs from the purview of an increase in loan to value ratio (LTV) for loans pledged against gold ornaments and jewellery, to be used for non-agricultural process.

The FIDC in its letter has said, "By restricting the applicability of the measure to banks, a vulnerable section of the population is effectively punished by exclusion. Gold loan-focused NBFCs, with their specialised experience in the field, would be well-placed to deal with the attendant risk involved,” it added.

Earlier this month, RBI decided to increase the permissible loan-to-value ratio (LTV) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes, from 75 per cent to 90 per cent. This relaxation will be available till March 31, 2021; beyond that, it will be again back to 75 per cent. Experts have said, this step by the RBI will place more money in the hands of borrowers and will help broaden the gold loan market.

Since it is for a short period of time, lenders who wish to take risks may opt for it by giving shorter duration of loans-—say six months. This has been done to provide liquidity to retail borrowers to help them tide over the crises. they added. 

Furthermore, FIDC has also asked the RBI to exempt NBFCs from the restrictions imposed on opening of current accounts by banks. Recently, the central bank said no bank can open current account for a customer who has availed cash credit or overdraft facility from others in the banking system, and from now onwards, all transactions will now have to be routed through the cash credit, or overdraft account.

Experts have suggested that this will bring more discipline in the banking system and ensure that borrowers “don’t round-trip the system and hide their financial or operational condition from the lenders.

In the letter FIDC said, NBFCs borrow from banks mostly as term loans and the percentage of borrowing as cash credit is low. An NBFC may operate its main collection/disbursement account with a bank from which it does not have a cash credit facility but only a term loan, for reasons of better service levels or branch strength in the geographical area served by the NBFC.

“There are existing regulations governing borrowing and end use of funds by NBFCs which are practical and provide a strong framework of governance and control. And, all banks seek NOCs from existing banks while opening current accounts of NBFCs,” said FIDC.