RBI's draft guidelines on gold loans may affect NBFCs, mid-tier banks more than large: Analysts 

The Reserve Bank of India (RBI) has released draft guidelines on gold loans, with analysts predicting a more significant impact on non-banking financial companies (NBFCs) and mid-tier banks compared to larger banks. The draft covers regulations like loan purpose classification, end-use monitoring, loan-to-value (LTV) ratios, and provisioning in case of breaches.

Notably, the new guidelines propose that LTV ratios for loans against gold collateral are capped at 75% on an ongoing basis, potentially affecting the growth of NBFCs in particular. 

Gold loan financiers may consider raising interest rates in response to these guidelines. However, intense competition among players like Cholamandalam, L&T Finance, and Poonawalla Fincorp could limit such increases. Analysts suggest that the stringent norms could slow growth in the near future. 

Suresh Ganapathy, head of financial services research at Macquarie Capital, remarked, "While the RBI governor may see this as harmonising and not tightening, I would still view this as tightening in terms of valuations, processes, and compliance. And that has a cost in terms of slower growth. Banks should be fine as anyway many of them follow these norms. But NBFCs will have to up their act." 

The draft retains the existing LTV limit of 75% but mandates its maintenance throughout the loan's tenor, affecting NBFCs more than banks. "We believe the impact of this will reduce the effective LTV of the product banks, given the buffers required for gold price fluctuations and interest payments. We also believe a separate collateral requirement for income generation and consumption loans, and restrictions for classification on income generation loans could affect potential demand," Macquarie Capital stated in its report.

Kotak Institutional Securities noted that the guidelines might decrease maximum LTV for gold loan NBFCs and reduce the internal rate of return (IRR) on loans. 

The gold loan sector, with an outstanding value of Rs 3.2 lakh crore as of September 2024, has seen rapid growth, particularly among banks. Banks' gold loan portfolios have grown at a 39% compound annual growth rate (CAGR) from FY20 to H1FY25, while NBFCs have grown at 27% CAGR during the same period. Despite this growth, gold loans constitute less than 1% of total credit for banks and around 4% for NBFCs. Analysts expect the gold loan market to grow at a 12% CAGR through FY24-27, though the new guidelines could slow this growth for NBFCs.

Muthoot Finance, holding the largest share of gold loans among NBFCs, is expected to be the most impacted by the guidelines. "The RBI’s new draft gold finance norms will be negative for growth. The LTV definition has been tightened more for NBFCs than banks. Furthermore, LTV of 75% or less will need to be maintained through the loan life, failing which there will be a penalty," stated a research report by Nuvama.