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Time of India
2 days ago
- Business
- Time of India
RBI's loan-to-value limit hike for gold loans to support NBFCs
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.
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Business Standard
06-05-2025
- Business
- Business Standard
Draft gold loan guidelines may slow down NBFCs' loan growth, says Crisil
The draft guidelines on gold loans released by the Reserve Bank of India (RBI) are likely to slow down loan growth for non-banking financial companies (NBFCs) focused on gold lending, said Crisil Ratings in a report. The draft guidelines propose that the loan-to-value (LTV) ratio be maintained within a ceiling of 75 per cent throughout the loan tenure, including both principal and accrued interest. According to the rating agency, enforcing a 75 per cent LTV ceiling would reduce disbursements for gold loans to 55–60 per cent from the current 65–68 per cent, particularly for bullet repayment loans. In the case of equated monthly instalment (EMI)-based loans, a higher LTV can be offered, but such loans typically lead to a rundown of the loan book. Both scenarios are likely to affect loan growth for NBFCs, said the agency. 'If implemented in the current form, the directions on LTV computation and breaches thereof can impact the growth prospects of gold loan NBFCs, as they will have to recalibrate their disbursement values. For bullet loans, we expect the LTV at disbursement to reduce from 65–68 per cent currently to 55–60 per cent, to factor in accrued interest and ensure LTV compliance. This will mean lower loan disbursement for the same value of gold jewellery. NBFCs may also look at periodic interest collection from customers to manage LTVs. Alternatively, they may decide to focus on EMI-based products,' said Malvika Bhotika, Director, Crisil Ratings. Moreover, if the LTV is breached continuously for 30 days, the lender will be required to make an additional 1 per cent standard asset provisioning, according to the draft. Additionally, renewals or top-ups of bullet repayment loans can only be extended after full repayment of accrued interest. This will reduce borrower flexibility and limit the ability of NBFCs to renew or top up loans seamlessly. According to the rating agency, this could create practical challenges for borrowers and impede loan renewal processes. With respect to disbursements and collections through banking channels, any cash disbursement or receipt must comply with the statutory provisions of the Income Tax Act, 1961, and related rules. The introduction of the term 'receipt' in the context of income tax compliance may pose challenges for cash collections exceeding ₹20,000, the agency said. Until May 2024, NBFCs were offering gold loans of less than ₹2 lakh in cash and were also collecting repayments and instalments in cash. 'As lenders re-orient their processes to comply with the revised regulations, expect some hiccups—similar to those seen in the past when implementing comparable guidelines. That said, the directions are expected to structurally strengthen the sector over time. Further, ultimate losses are also likely to remain in line with past trends due to strong risk management practices and timely auctions,' said Crisil.
