Reserve Bank's draft circular seeks to standardise gold loan regulations

Wed April 09 2025

The Reserve Bank of India Wednesday issued draft guidelines on gold loans as it looks to create a level playing field for banks and non-banking finance companies involved in this type of lending and plug gaps in the lending practices.

Last September, the central bank directed lenders to follow rules after it observed deficiencies in processes like loan appraisal, end-use monitoring, and lack of transparency in auctioning gold in case of defaults.

The draft aims at harmonising guidelines across various types of regulated entities, keeping in view their differential risk-bearing capabilities, Governor Sanjay Malhotra said while announcing the MPC’s policy decision.

According to industry executives, there are no specific guidelines on the gold loan business of NBFCs but banks follow a dedicated circular. Because of this, lenders followed different rules on calculation of loan-to-value or LTV ratio, value of loan compared to the underlying collateral.

As per the draft, lenders will have to compute TLV based on the total amount repayable by the borrower at maturity rather than the loan sanctioned at origination. The same will have to be maintained on an ongoing basis.

The maximum LTV is fixed at 75% in case of consumption gold loans. However, LTV ceiling of 75% will be applied to all gold loans sanctioned by NBFCs, irrespective of the purpose.

Another significant step proposed in the draft is the higher provisioning in case of breach of LTV. The entire outstanding amount shall attract an additional standard asset provisioning of 1% if the beach persists for over 30 consecutive days.

The RBI had invited comments on the draft latest by May 12.

“If the end use is for income generation, lenders (excluding NBFCs) can prescribe an LTV ratio as part of their policy, however additional due diligence including borrower cash flow assessment and primary security creation process could be operationally onerous,” said A M Karthik, Senior Vice President & Co-Group Head, Financial Sector Ratings at ICRA.

He added that the additional provision of 1% in case of breach in LTV, should however be manageable for large NBFCs operating in this segment, considering their overall business yield and healthy earnings performance.

V. P. Nandakumar, MD & CEO of Manappuram Finance said that the RBI’s decision to harmonize gold loan rules will be beneficial, especially gold loan NBFCs because currently there is no level playing field.

“NBFCs have always been at a disadvantage compared to banks, as the latter have access to cheaper funds, are eligible to offer gold-based agricultural loans, enjoy higher loan-to-value ratios, and benefit from favourable renewal policies,” he said.

On Wednesday, shares of gold financiers like Muthoot Finance, Manappuram Finance, and others like IIFL Finance and CSB Bank closed 2-7% as investors feared tighter regulations.

Source: https://economictimes.indiatimes.com/