RBI urges gold loan NBFCs to strictly comply with norms amid biz surge

RBI took stock of the gold loan business of non-banking finance companies after one of them - IIFL Finance faced regulatory restriction for violating norms

The Reserve Bank of India (RBI) has asked non-banking financial companies (NBFCs) to strictly comply with norms regarding loan-to-value ratio, auction processes, and cash disbursement after discovering that some of these companies violated regulatory guidelines.

According to sources, the regulator assessed the gold loan business of NBFCs after one of them, IIFL Finance, faced regulatory restrictions for violating norms.

The gold finance companies’ business recorded phenomenal growth since the pandemic, jumping from Rs 34,678 crore in March 2020 to Rs 1.31 trillion in March 2023, according to RBI data.

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Last week, in a communication to gold loan NBFCs, the regulator instructed them not to disburse more than Rs 20,000 in cash, citing provisions of the Income-Tax Act.

One concern was related to higher cash disbursements than the norms stipulate.

Sources revealed that many gold finance companies violated the cash disbursement component, extending 40-50 per cent of the loan amount in cash. The average ticket size of gold loans is around Rs 50,000 for most companies.

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“There were breaches in the past, maybe by a small margin, which the regulator tolerated since they were within the permissible limit. However, now they are emphasising strict adherence to the norms,” said a source.

In March, the RBI barred IIFL Finance, an NBFC, from sanctioning and disbursing fresh gold loans due to “material supervisory concerns” and to protect the interests of customers.

Similarly, the loan-to-value cap for NBFCs is set at 75 per cent. The regulator has instructed these firms to strictly adhere to the cap.

RBI Governor Shaktikanta Das stated that the regulator instructs entities to take corrective steps whenever there are violations.

“I would like to say that our supervision machinery in RBI, either for banks, NBFCs or lenders, regularly conducts supervision. Wherever we see major deviations in compliance and regulatory requirements, our first intent is to deal directly, bilaterally with them, sensitise them, work with them, and impress upon them to take corrective action,” Das said during the April monetary policy press conference when asked about recent restrictions against NBFCs.

“While working with them, when progress is not up to the mark, then on top of that, we apply supervisory restrictions, but as part of supervision, we regularly supervise the system and review the major players. So, I would not like to say that this is a system-wide problem because we have supervised every entity. We take action in outlier cases,” Das added.

The auction of gold due to non-payment is another area where the regulator has sensitised NBFCs to follow a transparent process.

Sources said RBI insists that the individual whose gold is auctioned should be aware of such a process being initiated. Additionally, the auction should be conducted at the taluka level so the person can be physically present during the auction.