'Growth challenges to continue for gold loan NBFCs'

Rating agency CRISIL said the Reserve Bank of India (RBI)'s new guidelines on lending against gold will weaken the competitive positions, growth prospects, profitability and asset quality of gold loan non-banking financial companies (NBFCs).

According to CRISIL, the profitability of these NBFCs would fall by nearly 75 basis points and their loan books decline in the near term. The new guidelines would, however, lead to sustainable growth in the long term, CRISIL said.

"The introduction of uniform valuation methodology for jewellery will limit the flexibility to offer loans at higher effective loan-to-value (LTV) ratios, and prompt customers to move to other lenders. RBI had standardised the method to calculate the value of gold in its guidelines," CRISIL said.

Pawan Agrawal, senior director, CRISIL Ratings, said: "Borrowers with limited stocks of jewellery will move to the unorganised sector that will continue to offer loans at higher LTV ratios... Interest-sensitive borrowers will shift to banks that offer loans at much lower costs for similar or higher LTV ratios."

The growth of the gold loan NBFCs will also be affected by two measures in the new guidelines - NBFCs need the regulator's approval before opening new branches and disbursal of loans above Rs 1 lakh should be made through cheques.

Increased competition will lead to reduced yield for gold loan companies, said the rating agency. Asset quality for the sector is under stress, and may remain thus over the next few quarters, on account of high-LTV lending carried out in the past, it added.

"In the near term, delinquencies will increase. However, over the long term, asset-side risks will materially reduce, given that effective LTV ratio at 60 per cent reduces the probability of default on future originations," said Rupali Shanker, director, CRISIL Ratings.