Red flag over gold loan firms' growth

The Reserve Bank of India (RBI) has raised concern on the rapid growth of gold loan companies, as the high dependency of these firms on banks for resources could pose risks to the lenders.

“The exponential growth in the balance sheets of NBFCs (non-banking financial companies) engaged in lending against gold in recent years, coupled with the rapid rise in gold prices and expansion in the number of their branches, could be a cause of concern,” RBI stated in the Financial Stability Report.

The central bank also pointed to gold loan companies that issued short-term retail non-convertible debentures (NCDs) frequently, especially through private placements, to meet their credit needs. “Concern arises, as some of these NCDs carry the features of ‘public deposits’. But these entities are not regulated in a manner akin to deposit-taking NBFCs,” it stated.

GOLD LOAN COMPANIES AND ASSOCIATED RISKS

• Concentration risk - Above 90 per cent of the loan assets being collateralised by only one product - gold jewellery
• Operational risk - Quick and easy loan can hamper quality of due diligence
• Reliance on borrowings, especially bank funds- Adverse development in recovery or an adverse movement in gold prices may have a spill-over impact on banks' asset quality

 

To tackle the growing interconnectedness of gold loan companies with banks, RBI had taken regulatory measures like de-recognising the priority sector status of bank finances to NBFCs for on-lending against gold jewellery, stipulating a loan-to-value ratio of 60 per cent for loans granted against collateral of gold jewellery and Tier-I capital of at least 12 per cent by April 1, 2014.