Context:
The Reserve Bank of India (RBI) released draft guidelines to regulate and harmonize gold loan practices across banks and non-banking financial companies (NBFCs). The proposed norms introduce a uniform 75% loan-to-value (LTV) cap, emphasize risk control measures, and aim to improve transparency in lending operations.
Market Impact
Following the announcement, gold loan NBFC stocks reacted negatively:
- Muthoot Finance: ↓ 7%
- IIFL Finance: ↓ 2.5%
- Manappuram Finance: ↓ 1.86%
Key Provisions in the Draft Guidelines:
LTV Ratio Capped at 75%
- Applies to all gold loans, including those for consumption purposes and all loans issued by NBFCs.
- The LTV cap is to be maintained throughout the tenor of the loan.
Prohibited Collateral Types
- No loans can be granted against:
- Primary gold or silver
- Financial assets backed by gold/silver, such as ETFs or mutual fund units
- Doubtful ownership of gold
- Repledged gold collateral
Risk & Credit Policy Requirements
- Institutions must include:
- Single borrower limits
- Sectoral exposure limits
- Mechanisms for verifying end-use of funds
- Standards for gold valuation and purity
- LTV monitoring protocols
Portfolio Ceiling for Gold-Backed Loans
- Lenders must set a ceiling on total gold loan exposure as a percentage of total loans.
- This limit must be periodically reviewed, considering:
- Granularity of borrowers
- Collection and recovery performance
- Auction results of collateral
- Economic capital and concentration risks
Borrower-Specific Limits
- A loan ceiling per borrower must be established, with clear differentiation between:
- Income-generating loans
- Consumption-oriented loans
- These limits should be applied fairly and non-discriminatorily.
The RBI’s proposed guidelines signal a move toward greater regulatory coherence and responsible lending in the gold loan segment. While NBFCs may face near-term headwinds, the long-term outcome could strengthen sectoral discipline and risk governance.
BS
