MUMBAI: After the Reserve Bank of India ( RBI) pointed out deficiencies in gold loan disbursals by banks and gold loan companies, the industry is now planning to introduce monthly amortisation plans. Under this, regulated entities could ask consumers to begin paying interest and principal in equated monthly instalments as soon as the loan resumes. Lenders are also exploring the term loan route to give loans against gold.
"The regulator's diktat is clear, it wants lenders to examine the payment capacity of borrowers and not solely rely on the collateral," said a senior banking official. "It is also unhappy with allowing rollover of such loans with part payment, which could lead to some delinquencies when repayments come up. We are now structuring monthly payment options for gold loans."
In a circular on September 30, the regulator pointed out irregularities in granting loans against gold ornaments and jewellery. This was after the central bank found issues in the sourcing of gold loans, valuation, due diligence, end-use monitoring, auction transparency, loan-to-value (LTV) ratio monitoring, and the application of risk weights. The regulator also found that rolling over gold loans with only part payment was a deficient practice.
As a practice, gold loan lenders offer a bullet repayment gold loan option, where the borrower can repay the entire amount at the end of the loan tenure. They need not make repayments as per any EMI schedule. Another option is to make partial repayments as and when funds are available with the borrower. Here, the borrower pays off the entire principal and interest amount before the end of the loan tenure.
The circular comes against the backdrop of high growth in the gold loan portfolio of both banks and NBFCs over the past few quarters. As per Crisil, retail loans against gold jewellery increased by 37% for banks between April and August even as gold prices rose. For gold-loan-focused NBFCs, growth in assets under management in the first quarter of FY25 was 11%.
"The sector faces underlying challenges as the continuous build-up of leverage raises concerns about borrowers' ability to service debt, especially given limited visibility into their cash flows or for that matter the end use of funds," said Prakash Agarwal, partner at consulting firm Gefion Capital. "A potential correction in gold prices could pose significant risks, as declining collateral values might create refinancing challenges and strain repayment capacity. Lenders must remain vigilant, balancing growth with prudent risk management to mitigate potential vulnerabilities."
As of September 30, banks had disbursed Rs 1.4 lakh crore as jewellery loans, a 51% rise, up from 14.6% reported in the year-ago period.
Gold loans have witnessed robust growth in recent quarters, supported by a significant rise in gold prices as it enabled additional top-ups on existing collateral. The challenges around the availability of unsecured and microfinance loans also pushed borrowers to avail of gold loans. However, RBI's strictures on inconsistencies identified during a recent review and comments on strengthening the controls could throttle growth to some extent.
"The regulator's diktat is clear, it wants lenders to examine the payment capacity of borrowers and not solely rely on the collateral," said a senior banking official. "It is also unhappy with allowing rollover of such loans with part payment, which could lead to some delinquencies when repayments come up. We are now structuring monthly payment options for gold loans."
In a circular on September 30, the regulator pointed out irregularities in granting loans against gold ornaments and jewellery. This was after the central bank found issues in the sourcing of gold loans, valuation, due diligence, end-use monitoring, auction transparency, loan-to-value (LTV) ratio monitoring, and the application of risk weights. The regulator also found that rolling over gold loans with only part payment was a deficient practice.
As a practice, gold loan lenders offer a bullet repayment gold loan option, where the borrower can repay the entire amount at the end of the loan tenure. They need not make repayments as per any EMI schedule. Another option is to make partial repayments as and when funds are available with the borrower. Here, the borrower pays off the entire principal and interest amount before the end of the loan tenure.
The circular comes against the backdrop of high growth in the gold loan portfolio of both banks and NBFCs over the past few quarters. As per Crisil, retail loans against gold jewellery increased by 37% for banks between April and August even as gold prices rose. For gold-loan-focused NBFCs, growth in assets under management in the first quarter of FY25 was 11%.
"The sector faces underlying challenges as the continuous build-up of leverage raises concerns about borrowers' ability to service debt, especially given limited visibility into their cash flows or for that matter the end use of funds," said Prakash Agarwal, partner at consulting firm Gefion Capital. "A potential correction in gold prices could pose significant risks, as declining collateral values might create refinancing challenges and strain repayment capacity. Lenders must remain vigilant, balancing growth with prudent risk management to mitigate potential vulnerabilities."
As of September 30, banks had disbursed Rs 1.4 lakh crore as jewellery loans, a 51% rise, up from 14.6% reported in the year-ago period.
Gold loans have witnessed robust growth in recent quarters, supported by a significant rise in gold prices as it enabled additional top-ups on existing collateral. The challenges around the availability of unsecured and microfinance loans also pushed borrowers to avail of gold loans. However, RBI's strictures on inconsistencies identified during a recent review and comments on strengthening the controls could throttle growth to some extent.
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