RBI's Gold Loan Regulations Likely to Slow Growth and Increase Defaults: CRISIL Report

RBI's Gold Loan Regulations Likely to Slow Growth and Increase Defaults: CRISIL Report

The Reserve Bank of India's (RBI) recent notification addressing gold loan practices may slow growth in the sector and increase asset quality stress in the short term, according to a report by domestic rating agency CRISIL. The notification, which requires lenders to review their practices, is expected to impact gold loan disbursements and curtail growth as lenders transition to stricter regulations.

CRISIL’s note highlights the notification's emphasis on monitoring deficiencies in loan-to-value (LTV) ratios, asset classification norms for overdue accounts, and inadequate due diligence regarding the end-use of gold loans. The agency predicts that this could lead to a temporary rise in loan delinquencies as lenders revisit their non-performing asset (NPA) recognition norms and policies for disbursing loans to existing customers.

Despite this, CRISIL noted that credit costs, a more accurate indicator of asset quality in the gold loan sector, are likely to remain under control. The firm cited India's cultural attachment to gold and the conservative approach to LTV ratios as key factors in mitigating the impact on credit losses. Lenders' ability to conduct timely auctions and recover dues will also help contain overall credit losses.

Malvika Bhotika, Director at CRISIL, explained that the new regulations aim to create uniformity in the gold loan market and safeguard borrower interests. She added that while disbursements may be affected in the coming quarters, gold loan growth for both banks and non-banking financial companies (NBFCs) is expected to taper.

Bhotika further noted that NBFCs, in particular, are likely to adapt to the new regulatory framework within a reasonable timeframe, similar to their adjustment following the limits placed on cash disbursements in the recent past.

A few weeks ago, the RBI raised concerns over irregular practices in loans against gold jewelry and directed lenders to comprehensively review their policies and processes. Lenders have been asked to identify any gaps in their current procedures and take remedial measures in a time-bound manner to ensure compliance with the new standards.