RBI norms to moderate gold loan companies' growth: Crisil

The Reserve Bank of India's (RBI) recent guidelines for the gold loan sector will significantly moderate the growth and profitability over the next year, said a Crisil report.

"Business growth is likely to fall from 80% per annum to 20-25% per annum and return on assets (RoA) is expected to fall from the currently high level of 4.5% to 2.5-3%," the rating agency said.

However, the RBI guidelines will have an overall positive impact on the sector over the long-term, as these will reduce regulatory uncertainties that the sector has witnessed in the recent past and enhance stakeholders' confidence, it said.

The guidelines will also significantly enhance the gold loan companies' ability to absorb the impact of any sharp decline in gold prices, thereby improving the sector's asset quality in the long term, it said.

RBI regulations cap the loan-to-value (LTV) ratios on lending against gold jewellery at 60% (compared with the current average LTV ratio of around 75%) and mandate a Tier 1 capital adequacy ratio (CAR) of 12%, it said.

The LTV cap is likely to result in significantly lower growth rates, as the borrowers will have to bring in additional jewellery to avail of a loan of the same amount, it said.

In addition, it said, this development could result in business volumes shifting to the unorganised sector, which will continue to extend loans at higher LTV ratios.

The currently high profitability of gold loan companies may also moderate, as these companies are likely to reduce pricing to protect their market shares and prevent a shift to the unorganised segment, it said.