RBI's draft gold loan norms: Compliance cost may rise for lenders

Banks and non-banking financial companies (NBFCs) may incur higher compliance costs if the Reserve Bank of India’s (RBI’s) draft guidelines on gold loans are implemented in their current form, said banking officials and experts.

 

According to the draft guidelines, banks and NBFCs need to adopt standardised documentation across all branches. Moreover, gold financiers have to establish proper collection and calculation methods, preventing any deviation.

 

“Currently, the cost of collection, documentation, and calculation as far as gold loans are concerned is around 2 per cent. If the guidelines are implemented as they are, the cost will increase to 4-5 per cent,” said an executive at a large gold loan NBFC.

 

He added that branches have to step up the process of standardisation, which would increase the cost of processing gold loans. 

 

According to the draft guidelines, lenders will have to ensure that a standardised procedure is put in place to assay the purity of gold collateral and its weight (gross as well as net).

 

This procedure will need to be adopted uniformly across all branches of the lender.

 

Further, lenders will have to appoint qualified assayers, who do not have any negative records in the past, for valuation of the gold collateral.

 

Lenders will need to ensure that there are no deviations in the method/ process for assaying and certifying purity and calculating net weight of the gold at the time of sanction of loan and at the time of return of the collateral or auction being conducted upon default in repayment of loan by the borrower.

 

Experts said that this will increase the operational cost of banks and NBFCs as they have to hire professionals as assayers.

 

“Surely, it will increase the compliance cost as today you are not assessing the income of the borrower while giving out a gold loan but now they have to put in a credit appraisal mechanism. It will increase the cost of operations as gold financiers have to hire people who are specialised in this. Therefore, the operational intensity will increase, and on the growth side, the loan-to-value (LTV) norms are 75 per cent all through, impacting growth as well,” said Anil Gupta, group head (financial sector ratings) ICRA.

 

Fitch Ratings had said the RBI’s draft proposals could increase operational complexity, particularly for smaller players. The changes are likely to introduce additional procedural burdens. The rules could raise costs for NBFCs, especially in rural areas where incomes are harder to assess.

 

Lenders may also have to tweak their gold loan products, like offering shorter repayment periods or equated monthly instalment (EMI)-based loans.

 

“We need to hire more people for this. Today, if a branch has 4-5 people as assayers but they are not as specialised as required under the draft guidelines, it will go up to 8-10 people in a branch. Moreover, doing an income assessment for so many borrowers will put an additional burden on the bank,” said a senior executive at a private bank. 

NEW GUIDELINES

 

*  Banks, NBFCs need to adopt standardised documentation across all branches 

 

*  Gold financiers have to establish proper collection and calculation methods, preventing any deviation

 

*  After guidelines are implemented, cost of collection, documentation, and calculation will increase from 2% to 4-5% 

 

*  Lenders will have to appoint qualified assayers, for valuation of the gold collateral

 

*  Fitch Ratings had said the RBI’s draft proposals could increase operational complexity