To rein in the unbridled growth of gold loans,the Reserve Bank of India today directed non-banking finance companies in the business to restrict the loan size to 60 per cent of the value (called Loan-to-Value) of gold jewellery.
This means if the value of the jewellery is Rs 10 lakh,NBFCs can extend only Rs 6 lakh as loan. Since there are no such restrictions till date,many companies extended up to 90-95 per cent of the value of the jewellery as loans.
The RBI also barred them from granting advances against bullion/primary gold and gold coins. It stipulated that NBFCs,for whom gold loans make up 50 per cent or more of financial assets,should maintain a minimum Tier l capital of 12 per cent by April 1,2014. To keep a tab on their growth,the RBI asked them to disclose the percentage of such loans to their total assets.
In a notification issued to all NBFCs today,the RBI noted the move has been necessitated given the rapid pace of business growth and the nature of their business model which has inherent concentration risk and is exposed to adverse movement of gold prices.
The Indian Express had recently published a series of articles about the explosive growth of gold loan business with minimal regulatory framework. NBFCs that are predominantly engaged in lending against the collateral of gold jewellery have recorded significant growth in recent years both in terms of size of their balance sheet and physical presence. This in turn,has led to their increased dependence on public funds including bank finance and non-convertible debentures issued to retail investors, the RBI said.
With gold gaining 36 per cent in value in 2011,the loan business is estimated to have topped Rs 75,000 crore during the year. An ICRA report said the organised gold loans market in India was estimated at between Rs 35,000 crore and Rs 40,000 crore by 2010-end with an annual compounded growth of approximately 40 per cent during fiscal 2002 to fiscal 2010. If prices crash by the same margin or even more in 2012,the impact on such NBFCs and the financial sector can be severe as these NBFCs themselves are big borrowers. Unlike banks,gold loan companies were enjoying a free run with lax regulations,raising the spectre of serious systemic risks.