RBI tightens regulations for 'golden' NBFCs
Jab ghar mein padha hai sona, tab kahein ka rona!
This catchy jingle was the talk of town recently and was part of the ad campaign for one of the NBFCs which lend against gold. With Indians being known to have a good saving habit and gold being a favourite for Indians of all classes, lending against gold has really taken off recently. Keeping in mind the risks to the banking system and retail investors, the Reserve Bank of India has tightened regulations pertaining to NBFCs which lend against gold by amending the rules for such NBFCs.
By way of amending notifications, the banking regulator has directed that the prudential norms applicable to companies having half their assets in gold be amended such that (a) they achieve a Tier-I capital (capital by way of equity or equity-like instruments) of 12% by April 2014, (b) these companies cannot lend more than 60% of the value of gold jewellery, (c) these NBFCs are also expected to disclose the percentage of the loans against the assets held by them, in their balance sheets, and (d) NBFCs are also prohibited from lending against gold coins and/ or bullion.
News reports indicate that the loan to value (LTV) ratios in the sector are currently above 60%. Companies have started recalling loans to adhere to the LTV ratio. CRISIL, which monitors most of the companies in the sector, believes that the RBI guidelines will have an overall positive impact on the sector over the long term as these will reduce regulatory uncertainties that the sector has witnessed in the recent past and enhance stakeholders’ confidence. The LTV cap is likely to result in significantly lower growth rates as borrowers will have to bring in additional jewellery to get the same same loan amount. In addition, this development could result in business volumes shifting to the unorganized sector, which will continue to extend loans at higher LTV ratios. The currently high profitability of gold loan companies may also moderate as these companies are likely to reduce pricing to protect their market share and prevent a shift to the unorganized segment.
This catchy jingle was the talk of town recently and was part of the ad campaign for one of the NBFCs which lend against gold. With Indians being known to have a good saving habit and gold being a favourite for Indians of all classes, lending against gold has really taken off recently. Keeping in mind the risks to the banking system and retail investors, the Reserve Bank of India has tightened regulations pertaining to NBFCs which lend against gold by amending the rules for such NBFCs.
By way of amending notifications, the banking regulator has directed that the prudential norms applicable to companies having half their assets in gold be amended such that (a) they achieve a Tier-I capital (capital by way of equity or equity-like instruments) of 12% by April 2014, (b) these companies cannot lend more than 60% of the value of gold jewellery, (c) these NBFCs are also expected to disclose the percentage of the loans against the assets held by them, in their balance sheets, and (d) NBFCs are also prohibited from lending against gold coins and/ or bullion.
News reports indicate that the loan to value (LTV) ratios in the sector are currently above 60%. Companies have started recalling loans to adhere to the LTV ratio. CRISIL, which monitors most of the companies in the sector, believes that the RBI guidelines will have an overall positive impact on the sector over the long term as these will reduce regulatory uncertainties that the sector has witnessed in the recent past and enhance stakeholders’ confidence. The LTV cap is likely to result in significantly lower growth rates as borrowers will have to bring in additional jewellery to get the same same loan amount. In addition, this development could result in business volumes shifting to the unorganized sector, which will continue to extend loans at higher LTV ratios. The currently high profitability of gold loan companies may also moderate as these companies are likely to reduce pricing to protect their market share and prevent a shift to the unorganized segment.
Labels: Gold Jewellery, Prudential Norms
posted by Satyajit Gupta @ 9:46 AM
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