RBI's stern warning to gold financiers likely to take a toll on NBFCs

While large players may not be impacted, lesser-vintage firms could have to mend ways

The Reserve Bank of India’s (RBI’s) stern warning about potential supervisory action against lenders violating gold loan norms is likely to impact non-banking financial companies (NBFCs) focusing on the segment, particularly those with lesser vintage.

Additionally, the regulator's diktat, directed more towards new fintechs, could lead to a slowdown in lending. This is because the market would seek to normalise growth in the segment, which is currently growing at a very fast pace, experts said.

RBI had on Monday directed banks and NBFCs offering gold loans to thoroughly review policies, processes, and practices to identify any gaps. They were told to closely monitor their gold loan portfolios amid significant growth seen by some lenders. Additionally, the RBI instructed these lenders to ensure adequate controls over outsourced activities and third-party service providers.

RBI’s concerns seem to be directed more towards non-traditional players like fintechs, who have a higher element of outsourcing in their business processes, said Krishnan Sitaraman, chief ratings officer at CRISIL Ratings.

According to Jeffries, tightening of processes following RBI’s warning may weigh on growth but large gold NBFCs should be better placed. 

“We think Muthoot Finance and Manappuram Finance, which have been regulated by the RBI for many years, are likely to be positioned better. However, some risks and hence overhang on the stock cannot be ruled out,” Jeffries said in its report.

Muthoot Finance and Manappuram Finance – two of the largest gold loan-focused NBFCs – saw their shares decline 3.7 per cent and 1.94 per cent, respectively, on Tuesday following RBI’s warning.

IIFL Finance, which faced regulatory curbs on gold loan business, on the other hand, saw its share price increase by 1.04 per cent on the BSE.

Similarly, Morgan Stanley, in a report on Tuesday, highlighted that entities with lesser vintage against gold jewellery could likely have more deficiencies.

“The time to take action should help, though there could be some near-term slowdown in gold loans,” said Morgan Stanley in its report.

According to Suresh Ganapathy, managing director (MD), head – financial services research, Macquarie Capital, the biggest impact will be on gold-financing NBFCs.

“In a strict circular, RBI has come up with some rules and regulations and warned everyone…get your act together otherwise face regulatory ire/action…so everyone should get your act together and bring down loan growth in gold loans,” he said.

RBI data shows that loan against jewellery of banks is growing at 41 per cent year-on-year (Y-o-Y) as of August end.

According to rating agency ICRA, organised gold loans by banks and NBFCs are expected to exceed Rs 10 trillion in FY25.

Additionally, the rating agency highlighted that overall organised gold loans have expanded at a compound annual growth rate (CAGR) of 25 per cent during FY20-FY24.

This was driven by banks, which expanded these loans at a higher CAGR of 26 per cent. NBFCs grew their loans at 18 per cent during the same period.

Bank gold loans are primarily driven by agriculture loans backed by gold jewellery, which grew at a CAGR of 26 per cent during FY20-FY24. Their retail gold loans grew by 32 per cent.

“Following action on one gold loan company in March, mostly gold loan-focused NBFCs have tightened their process standards. So, incremental adverse impact because of the RBI circular should not be that major,” said Karthik Srinivasan, senior president and group head, financial sector, ICRA Ratings. 

Following RBI’s action against IIFL Finance in March, the finance ministry had directed all state-owned banks to review their gold loan portfolio.

The department of financial services (DFS), in a communication to heads of public sector banks (PSBs), had asked them to look at their system and processes related to gold loan. State-owned banks have reviewed their portfolio and tightened processes, a PSB executive said. 


What are the concerns

Practice of rolling over loans at the end of tenor, with only part payment

Non-categorisation of gold loans as NPA in the system

Evergreening by renewing overdue loans

High number of gold loans to one individual with the same PAN

Average realisation from gold auction on default low than estimated value of gold

Many loan accounts closed within a short time from sanction