Loans against gold jewellery – a forte of non-banking finance companies (NBFC) and some south-based private banks till now – will now see increased competition, as public sector banks (PSBs) are planning to expand their presence here.
Apart from a few PSBs such as Indian Overseas Bank and Bank of India, government-run banks were not aggressive in the segment. While such loans are secured and offer healthy margins, lack of infrastructure such as verifying the purity of gold and the absence of a robust recovery mechanism, had made the government lenders shy away.
PSBs’ thrust in this segment also comes after the finance ministry nudged them to enter this lucrative segment and at a time when the central bank has been expressing some discomfort over NBFCs becoming aggressive here. The Reserve Bank of India (RBI) has taken away priority sector status given to banks for their loans to NBFCs for on-lending against gold jewellery, imposing a loan-to-value cap of 60 per cent. This means an NBFC cannot lend more than 60 per cent of the value of gold kept as collateral.
RBI has voiced concern on the rapid growth of gold loan firms, as those firms’ high dependency on banks for resources could pose risks to the lenders. RBI also highlighted operational risks in the NBFC business model, as quick and easy loans could hamper the quality of due diligence.
However, neither the finance ministry nor the central bank has advised a loan-to-value cap for PSBs. SBI, for example, offers 80-90 per cent of the value of gold as loan to customers.
SBI is planning a pilot project to install an instrument in its branches to verify the purity of gold. The bank has also asked its branches to encourage extending gold loans directly to farmers, as that will get priority sector status.
Banks have a target of extending 40 per cent of their loans to the priority sector.
