The Reserve Bank of India (RBI) on Wednesday released guidelines on the gold loan business of non-banking financial companies (NBFCs), prescribing a minimum Tier-I capital of 12 per cent and loan-to-value (LTV) ratio of 60 per cent. It also restricted NBFCs from offering loans against gold bullion and coins.
NBFCs have been given two years to meet the new capital adequacy norms.
The move is aimed at limiting unbridled expansion of the gold loan portfolio of NBFCs, which otherwise may create an asset bubble and affect the financial health of these firms and their stakeholders.
“It’s observed that NBFCs predominantly engaged in lending against the collateral of gold jewellery have recorded significant growth in recent years, both in terms of size of their balance sheet and physical presence. This, in turn, has led to their increased dependence on public funds, including bank finance and non-convertible debentures issued to retail investors," RBI said in a press release, adding this business model had inherent concentration risk and was exposed to adverse movements in gold prices.
Some of the private players offer loans against the yellow metal at LTV of over 70 per cent. For instance, Fedfina is lending gold loans at LTV of 75 per cent. Muthoot Finance has an average LTV of 72 per cent. RBI has capped the LTV at 60 per cent for loans against the collateral of gold jewellery.
LTV is calculated as a percentage of the loan to the value of gold jewellery kept as collateral. If a borrower keeps gold jewellery worth Rs 100,000 with an NBFC, according to new norms, he will be eligible for a maximum of Rs 60,000 as loan from the company.
NBFCs will also have to disclose the share of gold loans in their credit portfolio.
“RBI is wary of any sector that is showing rapid growth, as it may risk interdependent sectors,” said a senior official of an NBFC, which offers gold loans to its customers. “We had been contemplating that the rules would put a bar on branch expansion or the amount that could be lent. However, the regulations are quite different.”
The official, who requested anonymity, said the guidelines were not in line with the market expectations and they would have to assess the implications of these new norms.
NBFCs that have at least 50 per cent of their assets in gold loans will have to maintain a minimum Tier-I capital of 12 per cent by April 2014. The minimum capital adequacy ratio, however, has been left unchanged at 15 per cent.
NBFCs have been aggressive in expanding their gold loan portfolios, as the asset quality of these advances are more or less stable and the margins are relatively higher than other secured lending products.
RBI has intensified monitoring of the gold loan business of NBFCs in the last few months, after Manappuram Finance, a gold loan company, reportedly violated regulations pertaining to acceptance of deposits.
