The draft guidelines propose that lenders must link borrowers’ repayment capacity to the approved loan amount.
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The Reserve Bank of India’s (RBI) draft guidelines on gold loans, despite offering clarity on lending practices, could raise operational complexity for lenders, Fitch Ratings said in a statement on Tuesday. However, gold-loan specialists like Muthoot Finance and Manappuram Finance should be able to adjust to the new requirements.
The draft guidelines propose that lenders must link borrowers’ repayment capacity to the approved loan amount. They also provide better guidance on regulatory loan-to-value (LTV) calculations. Both these measures, Fitch stated, raises the bar for lenders. Adopting additional procedures to assess borrower income could prolong loan turnaround time and increase operational expenses.
While lenders may be able to introduce underwriting measures to meet the proposed requirements for individual consumption loans, such assessments may not be precise for rural and semi-urban customers, who generally have variable earnings.
NBFC question
“The draft rules also require lenders to conduct business cash flow assessments for income-generating gold-backed loans. We believe NBFCs are less likely to offer such loans, as the underwriting process may be too cumbersome. The draft rules do not specify whether NBFC loans to sole proprietors for working capital would be classified as income-generating loans, but if so, this could significantly slow an important source of credit to the rural economy,” it said.
Capping NBFCs’ gold loan LTV ratio at 75 per cent strengthens the financial buffer against adverse gold price fluctuations. However, the requirement would lower the effective LTV at loan origination, potentially reducing the product’s attractiveness to borrowers. To address the change, NBFCs may adjust their lending structures by offering shorter-tenor bullet repayment loans, or amortising repayment schedules. These changes, however, would require adjustment in customer behaviour and could prompt rising delinquencies if borrowers take longer to adapt.
“Lenders must set aside a 1 per cent provisioning charge on loans breaching LTV limits. This acknowledges that it can be difficult to rectify LTV breaches through collateral calls or repayment notices when gold prices decline. The amount is also manageable relative to net interest margins, but the measure will make credit costs and profitability more sensitive to collateral price falls,” Fitch said. ENDS
Published on April 15, 2025
