The Reserve Bank of India (RBI) has released a draft circular laying down fresh norms for lending against gold. This move, while still in the proposal stage, seems to have already triggered a shake-up in the stock market — shares of major gold loan Non-Banking Financial Companies (NBFCs) ended in the red on April 9.
Muthoot Finance’s stock fell sharply by 7%, IIFL Finance dropped 2.5%, and Manappuram Finance slid 1.86%. The buzz is that the proposed tightening of rules could hit gold-backed lending, a key business line for these firms.
If these draft rules get finalised, lenders will have to up their game on several fronts. The RBI wants them to clearly spell out norms for gold loan portfolios in their credit and risk policies. This includes setting limits for single borrowers, controlling overall exposure to the gold loan segment, ensuring the money is used properly, and maintaining strict valuation and purity standards for the gold used as collateral.
One of the major proposals is a ban on lending against primary gold or silver and financial products linked to them — such as gold Exchange-Traded Funds (ETFs) or Mutual Fund units. Also on the chopping block is re-pledged gold — meaning lenders can’t give loans using gold that’s already been pledged with someone else.
Additionally, if there’s any doubt about who owns the gold, lenders will have to stay away. That could plug some of the grey areas in current lending practices.
The RBI also wants NBFCs to put a ceiling on the total gold loan portfolio, as a proportion of their entire loan book. This isn’t just a one-time thing — they’ll have to review this limit from time to time, considering how efficiently they collect repayments, how successful they are with auctions (when borrowers default), how much capital they have to cushion risks, and whether they’re too exposed to a single type of asset.
Moreover, NBFCs must differentiate between loans taken for income generation (like a small trader pawning gold to buy stock) and those for consumption (say, to fund a wedding or holiday). For both types, there must be borrower-wise caps, and these should be applied fairly and without discrimination.
Another headline change is the Loan-to-Value (LTV) ratio — the amount one can borrow against the value of gold. The RBI wants this capped at 75% for all gold loans by NBFCs, and this cap must be maintained throughout the entire loan tenure.
In plain terms, if you pledge gold worth ₹1 lakh, you can’t borrow more than ₹75,000 — and that too must remain consistent until the loan is repaid. If the LTV goes beyond the limit due to falling gold prices or interest charges piling up, NBFCs may have to make additional provisions — 1% more, to be precise.
While NBFCs may have to rework their business models, banks might find these changes a bit more manageable. A private banker pointed out that banks are already required to monitor LTV throughout the loan tenure.
Plus, for income-generating purposes, banks may still be allowed to go beyond the 75% cap — a flexibility that NBFCs may not have.
Industry watchers feel that while the guidelines bring more clarity, they could crimp the growth of gold loans, especially in the NBFC sector. However, large players with strong earnings and efficient operations might weather the shift without much trouble.
A M Karthik, senior vice president at Icra Ratings, noted that the 1% provision in case of LTV breach is likely manageable for major NBFCs, considering their healthy margins.
Still, investors are clearly feeling jittery. The stock slump hints at market nerves about the potential fallout — even if the actual impact will depend on how the final guidelines shape up.