ICRA predicts banks will outperform NBFCs in gold loans due to RBI’s stricter guidelines on gold collateral lending

Sun April 13 2025

Banks will retain their competitiveness in gold loans in higher ticket loans vis-à-vis non-banking finance companies (NBFCs), per ICRA’s assessment of the RBI’s draft Directions on Lending Against Gold Collateral.

Further, doorstep gold loans and co-lending arrangements for both banks and NBFCs are likely to be impacted by stringent requirements for handling and storage of gold collateral.

While banks have been given a free hand to offer all income generating loans, including agriculture gold loans, with LTV (loan-to-value) ratio determined by their internal policy and not restricted to 75 per cent, the rating agency noted that NBFCs will have to maintain a LTV ceiling of 75 per cent for all gold loans, irrespective of the purpose (whether for income generation or consumption) of the sanction, per the rating agency.

LTV ratio is the ratio of the outstanding loan amount, including any accrued and unrealised interest, to the value of the collateral security.

According to the draft guidelines, the prescribed LTV ratio has to be maintained on an ongoing basis throughout the tenor of the loan. In case of a breach of regulatory LTV ratio, if the breach persists for more than 30 consecutive days, the entire outstanding amount will attract an additional standard asset provisioning of 1 per cent.

ICRA does not expect any significant impact on NBFCs on account of these incremental provisioning requirements.

However, the agency cautioned that growth would be impacted as entities offer loans based on the collateral value at the time of origination. Nevertheless, the tightened LTV requirements would safeguard the lender from sharp movements in gold prices.

In the case of bullet repayment loans (where the principal is due for repayment at the maturity of the loan), the LTV ratio is proposed to be computed by treating the total amount repayable by the borrower at maturity rather than the amount sanctioned at origination.

“Consequently, NBFCs would have to sanction lower amounts ( up to 25 per cent vis-à-vis the current practice) per weight of gold. Further, renewal of bullet repayment loans can only happen on complete servicing of interest, which could impact disbursements till borrowers adapt to the new requirements,” opined ICRA’s BFSI experts, including Karthik Srinivasan, Senior Vice President (Group Head) and AM Karthik, Senior Vice President (Co Group Head).

For example, for a 12-month bullet repayment taken at 20 per cent yield per annum, NBFCs would be able to lend only up to 62 per cent of the gold value vis-à-vis up to 75 per cent being offered as per the current practice.

Documentary evidence

Referring to the mandatory requirement of documentary evidence for all income generating loans, and for consumption loans above a threshold amount decided by the lender’s policy, the experts said this will lead to increased operational costs for lenders with focus on the former.

Touching on the proposal that requires lenders to keep a record of verification of the ownership of the collateral for all accounts , Srinivasan and Karthik expect increased operational rigour, given that an undertaking or suitable document has to be obtained to establish ownership (against the current regulation that requires keeping a record of verification of the ownership of the gold collateral more than 20 grams).

The experts observed that the proposed increase in reserve price on auctions of gold collateral to 90 per cent of the gold value from the existing 85 per cent is expected to support better recovery rates, thereby enhancing customer protection.

Nevertheless, they noted that the auction experience of entities historically suggest healthy recovery trends, limiting possibility of significant auction failures.

On the proposed clause that disallows loans against re-pledged gold collateral, ICRA’s experts said this will restrict loans to pawnbrokers, moneylenders and other lenders. This move is aimed at improving the retail borrower protection.

On the proposal to cap the tenor of consumption loans in the nature of bullet repayment loans at 12 months, they expect sanction of large-ticket consumption loans to be constrained, given the restricted tenors.

Last September, ICRA forecast the organised gold loans portfolio of banks and NBFCs to exceed ₹10 lakh crore in FY25, projecting it to reach ₹15 lakh crore by March 2027.

Source: https://www.thehindubusinessline.com/