RBI's Tighter Gold Loan Rules To Hit NBFCs Harder Than Banks, Says Nuvama

Nuvama anticipates that the Reserve Bank of India's newly proposed gold finance regulations might dampen growth within the sector. One aspect of these draft norms involves stricter norms for the loan-to-value ratio, that is set to impact non-banking financial companies more than banks.

While the maximum permissible LTV remains unchanged at 75%, a significant change mandates that for gold consumption bullet loans, the accrued interest must now be factored into the LTV calculation. This is a novel requirement for both banks and NBFCs.

For banks, the 75% LTV cap applies solely to consumption loans, whereas for NBFCs, this limit extends to both consumption and income-generation loans.

In cases where the LTV breaches the 75% threshold for more than 30 days, lenders will be required to provision 1% of the total loan amount. This provision can be reversed once the LTV is brought back to 75% or less and remains so for one month.

According to the brokerage, the market had previously feared that the RBI might mandate the repayment of both accrued interest and principal upon maturity before a loan could be rolled over.

The new norms permit the renewal or top-up of performing gold loans, provided the accrued interest is cleared before the rollover. This is based on the availability of headroom within the LTV limit and a fresh credit appraisal.

The RBI has introduced a requirement for lenders to clearly differentiate between consumption loans and income-generation loans. Only loans intended for consumption purposes should be classified as gold loans.

Loans extended for income-generating activities, like agricultural or business sectors, must be classified according to their specific end-use. Lenders are required to disclose these two categories of loans separately.

For income-generation loans, the credit assessment process should be based on the borrower's cash flows and business needs, rather than solely on the value of the gold collateral.

This new classification process is expected to be more challenging for lenders, according to the analyst particularly when dealing with small agricultural loans.

Banks currently benefit from lower risk weights on such loans, especially agricultural loans that have negligible risk weights due to their priority sector status. While consumption loans carry a risk weight of 75% under the regulatory retail category.

The central bank has also directed lenders to continue adhering to existing gold valuation norms. Additionally, lenders must fully comply with regulations concerning the auctioning of gold and the provision of compensation for delays or damages.

The RBI has also emphasized the need for lenders to review the adequacy of their gold storage systems. Regarding loan disbursements, while compliance with Information Technology provisions is mandatory, the RBI has expressed a preference for bank disbursements.