Mumbai: A recent notification from the Reserve Bank urging financiers to review their gold loan practices may slow down loan growth in the short term and potentially lead to an increase in asset quality stress, according to a domestic rating agency.
The agency, Crisil, stated that this could impact gold loan disbursements during the transition period and hinder business growth. The RBI had recently raised concerns about irregular practices in loans against gold jewellery, prompting lenders to review their policies and procedures to address any gaps.
Deficiencies in monitoring loan-to-value ratios, asset classification norms, and due diligence in overseeing the end-use of gold loans were highlighted in the notification. As a result, reported loan delinquencies may rise as lenders reassess their non-performing asset recognition norms and loan disbursals to existing customers.
Despite these challenges, the agency noted that credit losses in the gold loan business are generally under control due to Indians’ sentimental attachment to the precious metal. Maintaining conservative LTV ratios and efficient recovery processes also help mitigate credit losses.
Malvika Bhotika, the agency’s director, emphasized that the new regulations aim to ensure consistent application of guidelines in the gold loan sector and protect borrower interests. While adherence to these measures may impact loan disbursements in the coming quarters, both banks and NBFCs are expected to adjust to the regulatory changes over time.
In conclusion, the regulatory measures are intended to enhance transparency and safeguard the interests of borrowers in the gold loan market, ultimately benefiting the overall financial ecosystem.
