Draft gold loan guidelines may slow down NBFCs' loan growth, says Crisil

The draft guidelines on gold loans released by the Reserve Bank of India (RBI) are likely to slow down loan growth for non-banking financial companies (NBFCs) focused on gold lending, said Crisil Ratings in a report.

 

The draft guidelines propose that the loan-to-value (LTV) ratio be maintained within a ceiling of 75 per cent throughout the loan tenure, including both principal and accrued interest. According to the rating agency, enforcing a 75 per cent LTV ceiling would reduce disbursements for gold loans to 55–60 per cent from the current 65–68 per cent, particularly for bullet repayment loans.  In the case of equated monthly instalment (EMI)-based loans, a higher LTV can be offered, but such loans typically lead to a rundown of the loan book. Both scenarios are likely to affect loan growth for NBFCs, said the agency.

 

“If implemented in the current form, the directions on LTV computation and breaches thereof can impact the growth prospects of gold loan NBFCs, as they will have to recalibrate their disbursement values. For bullet loans, we expect the LTV at disbursement to reduce from 65–68 per cent currently to 55–60 per cent, to factor in accrued interest and ensure LTV compliance. This will mean lower loan disbursement for the same value of gold jewellery. NBFCs may also look at periodic interest collection from customers to manage LTVs. Alternatively, they may decide to focus on EMI-based products,” said Malvika Bhotika, Director, Crisil Ratings.

 

Moreover, if the LTV is breached continuously for 30 days, the lender will be required to make an additional 1 per cent standard asset provisioning, according to the draft.

 

Additionally, renewals or top-ups of bullet repayment loans can only be extended after full repayment of accrued interest. This will reduce borrower flexibility and limit the ability of NBFCs to renew or top up loans seamlessly. According to the rating agency, this could create practical challenges for borrowers and impede loan renewal processes.

 

With respect to disbursements and collections through banking channels, any cash disbursement or receipt must comply with the statutory provisions of the Income Tax Act, 1961, and related rules.

 

The introduction of the term ‘receipt’ in the context of income tax compliance may pose challenges for cash collections exceeding ₹20,000, the agency said.

 

Until May 2024, NBFCs were offering gold loans of less than ₹2 lakh in cash and were also collecting repayments and instalments in cash.

 

“As lenders re-orient their processes to comply with the revised regulations, expect some hiccups—similar to those seen in the past when implementing comparable guidelines. That said, the directions are expected to structurally strengthen the sector over time. Further, ultimate losses are also likely to remain in line with past trends due to strong risk management practices and timely auctions,” said Crisil.