Last September, the central bank instructed lenders to follow the rules after observing flaws in processes such as loan assessments, end-use monitoring and transparency in auctioning gold in case of default.
Announced the MPC’s policy decision, Governor Sanjay Malhotra said the draft was intended to coordinate guidelines for various normative entities to consider their ability to differential risk.
According to industry executives, NBFC’s gold loan business has no specific guidelines, but banks follow dedicated notices. Therefore, lenders follow different rules for calculating loan or LTV ratios, the value of the loan compared to the underlying collateral.
Under the draft, lenders will have to calculate TLV based on the total amount the borrower repaid at maturity, rather than the loan approved at the time of origin. The same situation must be maintained continuously.
In the case of consumer gold loans, the maximum LTV is fixed at 75%. However, the LTV cap of 75% will apply to all gold loans approved by NBFC, regardless of their purpose. Another important step proposed in the draft is the higher supply proposed in the case of LTV violations. If the beach lasts for 30 days for 30 days, the entire outstanding amount should attract a 1% additional standard asset supply. The Reserve Bank of India invited comments on the latest draft by May 12.
“If the end use is for revenue generation, lenders (excluding NBFCs) can open LTV ratios as part of their policy, but include borrowers’ cash flow assessments and the primary security creation process, including additional due diligence,” said Am Karthik, senior vice president and co-president leader.
He added that given their overall business earnings and healthy revenue performance, an additional 1% rule should be manageable for large NBFCs operating in this segment in the event of LTV violations.
Nandakumar, MD and CEO of Manappuram Finance, said the RBI’s decision to coordinate gold loan rules would be beneficial, especially gold loan NBFC, as there is currently no level of competitive environment.
“NBFC has been at a disadvantage compared to banks, as the latter can use cheap funds, qualify for gold-based agricultural loans, enjoy higher loan value and benefit from favorable renewal policies,” he said.
Shares of others such as Muthoot Finance, Manappuram Finance, as well as IIFL Finance and CSB Bank were closed 2-7% on Wednesday as investors feared stricter regulations.
