RBI cracks vigilant whip; directs NBFCs to strictly comply with gold loan parameters

• Follow

Cracking its vigilant whip, the Reserve Bank of India (RBI) has directed non-banking financial companies (NBFCs) not to deviate an inch from the norms of gold loans in all the parameters including loan-to-value ratio, auction processes and cash disbursement ceilings. The banking regulator swung into action after it was shocked by growing evidence that several of the lending companies violated guidelines.

Down the years, RBI has been extremely vigilant about monitoring burgeoning loans and has been regularly warning stakeholders about the build-up of risks in certain sections of the financial ecosystem such as unsecured loans.

The first alert about risky practices in the domain of gold loans came after RBI found out that IIFL Finance was for violating norms. It promptly clamped restrictions on the NBFC’s gold loan activities.

The RBI action has become significant since the business of gold loans is booming in the country. It took a quantum jump from Rs 34,678 crore in March 2020 to Rs 1.31 lakh crore in March 2023.

In the week beginning May 6, RBI directed them not to disburse more than Rs 20,000 in cash while disbursing gold loans. Provisions of the Income-Tax Act have prescribed this ceiling. The handing out of cash in violation of the ceiling was not taken lightly by the RBI which got the information that quite a few gold loan companies were giving out cash much in excess of the limit.

Incidentally, the average size of gold loans was about Rs 50,000 for most companies.

“There were breaches in the past, maybe by a small margin, which the regulator tolerated since they were within the permissible limit. However, now they are emphasising strict adherence to the norms,” an official told Business Standard referring to the breach of the cash ceiling.

The banking regulator also took a stern view of the violations regarding 75% loan-to-value ratio. “I would like to say that our supervision machinery in RBI, either for banks, NBFCs or lenders, regularly conducts supervision. Wherever we see major deviations in compliance and regulatory requirements, our first intent is to deal directly, bilaterally with them, sensitise them, work with them, and impress upon them to take corrective action,” RBI governor Shaktikanta Das said during the media interaction after the monetary policy meeting in April.

“While working with them, when progress is not up to the mark, then on top of that, we apply supervisory restrictions, but as part of supervision, we regularly supervise the system and review the major players. So, I would not like to say that this is a system-wide problem because we have supervised every entity. We take action in outlier cases,” the RBI boss added. The auction of gold due to non-payment is another area where the regulator has sensitised NBFCs to follow a transparent process.

The regulator is of the view that the company concerned must inform the debtor whose gold Is being put to auction. In order to ensure that the person whose gold held as collateral is able to be present during the process, the auction should be conducted at the taluka level.

Another area of concern of the regulator has been the quality of gold that is being accepted as the collateral for giving out the loan. The first level of check is usually conducted by field agents of a bank or NBFC and there is information that the quality of gold being accepted is not always up to the mark. This has been noticed where fintechs are involved in the gold loan process. Needless to say, if the practice spreads, it could result in risk building up in the asset quality of any bank or NBFC.