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Sunday, June 16, 2024, 12:40 pm

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RBI monitoring loans made in gold.

RBI monitoring loans made in gold.
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RBI monitoring loans made in gold.

 

Why did the central bank start to closely examine NBFCs’ gold lending operations more closely?

 

In an effort to strengthen its control over non-banking financial companies (NBFCs), the Reserve Bank of India (RBI) instructed gold loan lenders earlier this month to adhere to regulatory standards while lending. Following its discovery that some NBFCs were violating regulatory standards, the RBI has stepped up its investigation of NBFCs.
After discovering that IIFL Finance was breaking lending guidelines, the RBI prohibited the company from making any more gold loans in March.

 

Which rules govern gold loans by the RBI?

Lenders are required by the RBI to adhere to specific guidelines when making loans in place of gold. For example, lenders are prohibited from making any loans larger than 75% of the gold that the borrower submits as security. This is to make sure that in the event that the borrower defaults on the loan, banks will have enough cushion to cover any losses from selling the gold.
Additionally, the RBI requires that, in order to comply with income tax regulations, no more than ₹20,000 of a loan be paid to a borrower in cash; the remaining loan amount must be put into the borrower’s bank account.

 

Lenders must conduct fair and transparent gold auctions in accessible places for borrowers who default.  The RBI is developing comprehensive standards for gold loans, which lenders must adhere to.

 

Why is the RBI aiming to strengthen these norms now?

According to the RBI, several NBFCs have violated gold-based lending norms. IIFL Finance was reprimanded in March for breaking loan disbursement criteria, gold appraisal, charge levying, and auction violations. The RBI discovered abnormal loan-to-value ratios in more over two-thirds of defaulting accounts at IIFL Finance.

 

In order to build their business, NBFCs may offer loans worth more than 75% of the collateral. NBFCs may intentionally exaggerate the value of the gold borrowers provide as collateral.
The RBI is concerned about how NBFCs assess and value gold, which is understandable.

 

Lenders like IIFL Finance used internal assayers to assess the purity and value of gold collateral provided by borrowers. Banks’ gold loans require external assayers to determine the purity and worth of the gold, unlike this approach. Since the epidemic, NBFCs’ gold loan portfolio has quadrupled from over ₹35,000 crore in FY 2020 to ₹1,31,000 crore by FY2023.

 

The RBI may be concerned about NBFCs’ aggressive lending practices, which may violate lending regulations and pose systemic issues as the gold loan business expands rapidly.

What impact will the RBI’s monitoring have on non-bank financial institutions?

The RBI’s examination of NBFCs’ lending practices is expected to impact their profitability and growth. The RBI’s requirement for a maximum cash disbursement of ₹20,000 upon loan approval may reduce the appeal of NBFC gold loans.
NBFCs offer emergency liquidity to borrowers on short notice, unlike banks. This is especially beneficial for non-banking customers who predominantly use cash. The RBI’s stricter enforcement of loan-to-value ratios may require NBFCs to scale back their lending activities.

 

During the pandemic, the RBI temporarily allowed lenders to lend up to 90% of the value of the underlying gold collateral, allowing NBFCs to aggressively increase their loan books.
Making the auction process more open and accessible to borrowers may increase the cost of doing business for NBFCs and result in higher borrowing rates for lenders. The RBI may assume that its lending standards will ensure the long-term viability of the gold loan industry and prevent systemic problems.

 

 

ABHISHEK VERMA

 


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