RBI's Gold-Lending Guidelines: Harmonisation Of Loan-To-Value Norms; Nothing Disruptive, Says Motilal Oswal

A few NBFCs, which are in gold lending, as well as some small finance banks and other midsized banks, had acknowledged in their respective earnings calls over the last two quarters that they were asked by the regulator to adhere to the LTV cap of ~75% throughout the tenor of the loan. Once the final guidelines are published, all NBFCs will have to adhere to the LAP cap of 75% throughout the loan tenor. This would also entail a change in policies around when margin calls are sent out to borrowers and when auction notices are sent and executed.

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Motilal Oswal Report

The Reserve Bank of India has issued revised draft guidelines on gold lending, which will not disrupt or tighten gold-lending activities. It is instead intended to harmonize the guidelines for regulated entities in gold lending and provide a level playing field for all classes of lenders in this product segment.

The revised guidelines aim to:

1. establish a harmonized and uniform regulatory framework,

2. address concerns related to prevailing lending practices, and

3. strengthen conduct-related standards across gold-lending operations.

While the revised guidelines introduce several operational enhancements missing in the previous framework, the important changes are:

1. the maximum Loan-to-Value ratio to be maintained at ~75% throughout the tenor of the loan,

2. an additional 1% standard asset provision on the outstanding amount if the regulatory LTV ratio is breached for 30 consecutive days,

3. no renewal of gold loans if the maximum regulatory LTV is in breach at the time of maturity, and

4. bullet repayment loans would have a maximum tenor of 12 months.

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