MUMBAI: The recent draft RBI directions on loans against gold collateral are set to hit the asset growth of pure-play gold loan companies. The directions are aimed at harmonizing the regulatory framework across regulated entities and addressing differences in lending practices, thus creating a level playing field and structurally strengthening the sector.
The draft directions, issued last month, came in the backdrop of the central bank in September 2024 highlighting irregular practices amid a significant increase in the loan-against-gold portfolio of some lenders. It had then asked lenders to comprehensively review their policies, processes and practices to identify gaps and initiate remedial measures in a timebound manner.
Last fiscal, the combined loans against gold jewellery portfolio of banks and non-banks is estimated to have grown by over 50%; for banks alone, the business more than doubled, growing 104%, the agency said.
“The draft directions, pertaining to loan to value (LTV) and renewal/top-up of bullet loans, if implemented in their current form, can slow down the loan growth of non-banks focused on gold loans,” Crisil Ratings said in a note Tuesday without quantifying the slowdown.
In terms of LTV, the draft directions ask for a ceiling of 75% to be maintained through the loan tenure. More importantly, the LTV computation for bullet repayment needs to factor in the total amount repayable by the borrower at maturity, including accrued interest, rather than just the initial disbursed principal amount.
Moreover, if LTV is breached for a continuous 30 days, the lender has to make an additional 1% standard asset provisioning.
According to Malvika Bhotika, a director with Crisil, if implemented in current form, the directions on LTV computation and breaches thereof can impact the growth prospects of pure-play gold-loan companies as they will have to recalibrate their disbursement value. For bullet loans, the LTV at disbursement is expected to come down from 65-68% currently to 55-60% to factor in accrued interest and ensure LTV compliance.
This will mean lower loan disbursement for the same value of gold jewellery. Non-banks may also look at periodic interest collection from their customers to manage LTVs. Alternatively, they may decide to focus on EMI-based products, she added.
On the other hand, the additional provisioning for LTV breaches, although higher than at present for gross stage 1 assets maintained by most non-banks, is unlikely to have a significant impact on profitability during the transition period.
Another important direction is on the process for loan renewal and/or top-up. Renewals of, or top-ups on, bullet repayment loans can be extended only after the repayment of the entire accrued interest. This will reduce the flexibility of borrowers and curtail the ability of non-bank lenders to renew/top-up loans seamlessly, she said.