Shift in Gold Loan Lending: RBI Guidelines are Pushing Gold Financiers Towards Cash-Based Assessment
By Kshipra Petkar
Loan providers in the gold sector face increasing costs
The Reserve Bank of India (RBI) is pushing gold financiers to abandon their traditional collateral-based lending strategies in favor of cash flow assessment. This transition, brought about by the new RBI guidelines, is anticipated to lead to increased upfront costs for lenders as they adapt to this shift.
According to a report by India Ratings, the operating expenses for these lending institutions have witnessed a steady increase due to increased regulatory scrutiny and enhanced requirements for know-your-customer identification and gold purity assessments as per the RBI rules.
[Related Enrichment Data: RBI Guidelines for Gold-Backed Loans are detailed policies implemented by the Reserve Bank of India to regulate and standardize the gold lending industry. They aim to promote transparency, responsible lending, and borrower protection.]
This month, the RBI raised the loan-to-value (LTV) ratio for gold loans from 75% to 85% for borrowings under Rs 2.5 lakh. The LTV ratio has been fixed at 80% for loan amounts between Rs 2.5-5 lakh, and 75% for loans above Rs 5 lakh. Lenders will have until April 1, 2026, to prepare for these changes.
"We believe lenders will have more room to offer shorter-term loans aimed at gold-backed consumption for smaller borrowers, enabling them to access more value from their pledged assets," said Shinoy Varghese, credit analyst at S&P Global Ratings, in a report.
Furthermore, as lenders venture into new models and expand their risk appetite, there's a possibility of higher LTV norms emerging, particularly for income-producing loans. This increase in LTVs might heighten sensitivity towards sharp corrections in gold prices.
[Related Enrichment Data: LTV or Loan-to-Value ratio is a measurement that compares the amount of money borrowed against the collateral - in this case, gold. A higher LTV ratio signifies a lower risk exposure for the lender.]
In comparison to the earlier regulatory cap of 75%, many financial institutions operating in this sector have maintained an average LTV ratio below this level, offering a buffer against potential gold price drops.
Umesh Mohanan, ED & CEO at Indel Money, shared his insights: "Rising global gold prices have boosted demand for gold loans while reducing non-performing assets (NPAs). With surging gold prices, people face more financial emergencies and turn to gold loans, resulting in less NPAs as pledged gold serves as an attractive collateral."
Regarding the new RBI guidelines on gold auctioning, they provide a more streamlined and transparent process, making gold auctions more uniform. This move eases the risk of auction delays, eliminates the discretion of lenders in accommodating borrowers when gold prices surge, and necessitates real-time risk filtering and alerts for borrowers to avoid liquidation.
"Over the past year, our company has seen a steady decrease in our stage-III gold loan portfolio and auction amounts. This trend indicates a shift towards our customer-centric approach, where early engagement and structured repayment plans are helping borrowers hold onto their assets while boosting portfolio health," stated George Alexander Muthoot, Managing Director at Muthoot Finance.
In conclusion, the RBI's move emphasizes safer, more transparent gold loan practices by limiting collateral exposure and encouraging cash flow-based lending assessments. This transition necessitates significant operational, risk management, and technological upgrades from gold loan financiers, potentially reducing loan sizes and increasing scrutiny on borrower repayment capacity.
[Related Enrichment Data: Stage-III gold loan refers to a loan category in which a borrower fails to repay the loan during the initial due date, signaling high risk of default.]
- The finance industry, including banking and insurance, may be interested in the shift in gold loan lending, as the new RBI guidelines could lead to increased upfront costs for lenders.
- As gold financiers adapt to cash flow assessment, they might explore new models in the decentralized finance (DeFi) market, expanding their risk appetite and potentially higher LTV norms.
- The rise in global gold prices has led to a boost in demand for gold loans, possibly causing a decrease in non-performing assets (NPAs) for many financial institutions.
- With the RBI's focus on transparency and borrower protection, gold auctions will become more streamlined and uniform, reducing the risks of auction delays and necessitating real-time risk filtering for borrowers.
