RBI's loan-to-value limit hike for gold loans to support NBFCs

Time of India

a day ago

The increase in the loan-to-value (LTV) ceiling provided in the final directions on
gold loans
by the
Reserve Bank of India
(
RBI
) will support the growth of
non-banking financial companies
(NBFCs) offering gold loans, according to a
Crisil Ratings
report released today.
The benefit will still be applicable despite the change in LTV computation for bullet repayment loans, which now need to factor in the accrued interest payable at the time of maturity, in addition to the initially disbursed principal amount. The increase in LTV ceiling will help offset this impact.
In May this year, Crisil Ratings had highlighted that the draft directions issued at that time on LTV and renewal/ top-up of bullet loans, if implemented as is, would slow down the growth of NBFCs focused on gold loans. That said, the final directions issued recently propose an LTV grid based on ticket size and permit higher LTVs for lower-ticket consumption loans. The permitted increase in LTV is highest for loans with a ticket size of less than Rs 2.5 lakh, with the limit now at 85% vis-à-vis 75% earlier.
As per Crisil Ratings estimates, loans with a ticket size less than Rs 5 lakh comprise close to 70% of the
gold loan portfolio
for NBFCs.
Says Malvika Bhotika, Director, Crisil Ratings, 'The revision in
LTV norms
for lower-ticket loans is expected to benefit gold loan-focused NBFCs in two ways. First, it will provide a higher cushion to meet the LTV requirements even after factoring in accrued interest in bullet repayment loans. Second, this will provide additional headroom for lending. For bullet loans, the LTV at disbursement could increase somewhat from 65-68% currently to 70-75%. That said, disbursement at higher LTVs will mean lower cushion to manage gold price fluctuations and will necessitate a sharper focus on risk management practices and timely auctions to manage ultimate losses.'
Notably, the draft directions had proposed to have 1% additional standard asset provisioning in case of LTV breaches for a continuous period of 30 days. The final directions have not made any reference to this additional provisioning. However, the credit policy of the lender must specify the action to be taken for LTV breach as well as the trigger event for auction, among others.
Another important direction is the process to be followed for
loan renewal
and/or top-up, which is in line with the draft directions issued earlier. For bullet repayment loans, renewals or top-ups can be extended only after repayment of the entire accrued interest. Hence, NBFCs will need to focus on periodic interest collection to maintain their ability to offer renewal/ top-up loans.
The directions are applicable from April 1, 2026, giving NBFCs the required time to reorient their systems and processes to comply with the revised regulations. While there could be some hiccups for certain players as they realign their operations, the regulations will benefit the sector and harmonise the regulatory framework across all regulated entities.
That said, the ability of NBFCs to manage increasing competition, from banks in particular, will bear watching as these directions apply to all regulated entities.