RBI Scrutinizes Gold Loan Norms To Tighten Grip

May 20, 2024

The Reserve Bank of India (RBI) made it harder for Non-Banking Financial Companies (NBFCs) to do business by telling them in March that they had to follow the rules for gold loans carefully. As a result of breaking these rules, IIFL Finance was not allowed to give out any more gold loans.

What is the Reasons for the Reinforcement of Gold Loan Norms?

The RBI made its choice after discovering that some NBFCs had broken the rules by overvaluing collateral and not following loan-to-value ratios. These violations show that NBFCs are putting too much emphasis on growth over caution, which could lead to widespread problems as the sector grows. The RBI says: –

The loan amount can’t be more than 75% of the gold’s value. This ensures that lenders have extra money in case the borrower doesn’t repay the loan.
No more than ₹20,000 can be given out in cash; any more money must be sent through a bank transfer.
Gold that has been repossessed must be auctioned off clearly so that borrowers can see the lots.

Implications of Increased RBI Scrutiny for NBFCs

By making it harder to get cash right away, the tighter control should:

Make NBFC gold loans less appealing.
Slow down the rapid growth of loan books by making sure that loan-to-value limits are strictly followed.
Raise the costs of doing business for NBFCs because gold bids need to be more open and clearly marked.

More About RBI’s gold loan norms

Under the gold loan, the Reserve Bank of India (RBI) says that commercial banks can give up to 90% of the value of gold jewellery starting in 2021. This is up from 75% before. This higher Loan to Value ratio (LTV) will last until March 31, 2022, and is meant to ease the stress on the economy caused by COVID-19. These loans have lower interest rates than personal loans because they are backed by something. In order to get a loan, the gold must be between 18 and 24 karats pure. Gold loans can be paid back over a period of a few months to a few years, based on the lender’s rules. Non-banking financial companies (NBFCs) also offer gold loans, but their interest rates and LTV ratios are not the same as banks’.

What is the loan-to-value ratio?

The loan-to-value ratio (LTV) compares the loan amount to the value of the item being bought. This ratio is often used in mortgage lending. Lenders like LTVs that are 80% or less to lower their risk. If the LTV ratio is high, you may need to get extra mortgage insurance. Interest rates can be changed by the LTV. Usually, smaller LTVs mean better rates. For borrowing, the LTV is a key factor in figuring out who is eligible. After 2008, mortgage rules put more emphasis on LTV analysis to stop lenders from giving out too many risky loans. By raising the property’s value, home improvements can change the LTV. When figuring out the LTV, closing costs are not included in the property value.

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