Proposed RBI norms may hit gold-loan NBFCs in near term: Analysts

The Reserve Bank of India’s (RBI’s) draft guidelines on gold loans, if implemented in their current form, are expected to impact non-banking financial companies (NBFCs) and mid-tier banks in the near term, more significantly than larger banks, according to analysts.

 

Some analysts noted that gold loan financiers may consider increasing interest rates on such loans. However, intense competition among existing players and new entrants like Cholamandalam, L&T Finance, and Poonawalla Fincorp could limit the extent of any rate hikes.

 

In the draft guidelines, the RBI has proposed norms covering loan purpose classification and strict end-use monitoring; loan-to-value (LTV) ratios and provisioning requirements in case of breach; credit appraisal of borrowers; sectoral exposure limits; valuation and assaying of gold collateral; and fair lending practices.

 

“While the RBI governor may see this as harmonising and not tightening, I would still view this as tightening in terms of valuations, processes, and compliance. And that has a cost in terms of slower growth. Banks should be fine as anyway many of them follow these norms. But NBFCs will have to up their act,” said Suresh Ganapathy, head of financial services research, Macquarie Capital.

 

Although the draft guidelines have kept the LTV unchanged at 75 per cent, the RBI has proposed that LTV ratio of lending against gold collateral will be capped at 75 per cent on an ongoing basis through the tenor for gold loans and for all gold loans sanctioned by NBFCs. Further, for bullet repayment loans, LTV should be computed on the total payment (i.e., inclusive of interest). Additionally, for NBFCs, the LTV is capped both on consumption and income-generation loans.

 

Currently, LTV is calculated as a ratio of the value of the loan principal disbursed and the current value of gold.

 

“We believe the impact of this will reduce the effective LTV of the product, given the buffers required for gold price fluctuations and interest payments. We also believe a separate collateral requirement for income generation and consumption loans, and restrictions for classification on income generation loans could affect potential demand,” Macquarie Capital said in its report, adding that banks currently follow most of the regulations and the potential impact here will be larger for NBFCs.

 

“LTV calculation has become cumbersome for us. Major chunk of the gold loans portfolio belongs to bullet repayment customers. Therefore, it will reduce disbursements by 5-10 per cent,” said a senior official with a large gold loan NBFC.

 

Kotak Institutional Securities, in its report, stated that the proposed guidelines are expected to reduce maximum LTV for gold loan NBFCs, increase competition from moneylenders and/or reduce internal rate of return (IRR) on loans.

 

According to a report by JM Financial, though these (proposed) guidelines are beneficial over the long term, they are likely to impact gold loan growth for lenders (especially NBFCs/mid-sized banks) in the near term.

 

As of September 2024, the total system gold loan outstanding stood at ₹3.2 trillion, growing at over 27 per cent compound annual growth rate (CAGR) between 2019-20 (FY20) and the first half of 2024-25 (H1FY25). Banks have been even more aggressive than NBFCs in this segment, with its portfolio growing more than 39 per cent CAGR over FY20-H1FY25, leading to market share gains for banks. However, despite growing fast, gold loans remain less than 1 per cent of total credit for banks. For NBFCs as a sector, gold loans constitute around 4 per cent of total credit.

 

Post these guidelines, the gold loan market may grow at a 12 per cent CAGR through FY24-27, according to industry estimates.

 

Among NBFCs, Muthoot Finance holds the largest share of gold loans, followed by Manappuram Finance, Fedfina, and IIFL Finance, among others. Among banks, City Union Bank and Federal Bank have a significantly high proportion of gold loans in their portfolios.

 

On Friday, Muthoot Finance’s shares tumbled 5.74 per cent while IIFL Finance’s stock closed in the red and Manappuram Finance’s scrips ended the day in the green.

 

“The RBI’s new draft gold finance norms will be negative for growth. The LTV definition has been tightened more for NBFCs than banks. Furthermore, LTV of 75 per cent or less will need to be maintained through the loan life, failing which there will be a penalty. This rule already exists for banks, but is new for NBFCs. Therefore, the new norms will impact loan growth for NBFCs more than banks. Muthoot stands most impacted,” said Nuvama in its research report.