executive summary

the reserve bank of india (rbi) has introduced draft guidelines concerning gold loans, signaling a potential shift in the landscape for non-banking financial companies (nbfcs) and mid-tier banks. these guidelines encompass various aspects, including loan purpose classification, end-use monitoring, loan-to-value (ltv) ratios, and provisioning for breaches [[1]]. analysts anticipate that these regulations will disproportionately affect nbfcs compared to their larger banking counterparts.

ltv ratios under scrutiny

a key highlight of the new guidelines is the proposed cap of 75% on ltv ratios for loans secured against gold collateral. this measure is expected to particularly impact the growth trajectory of nbfcs. the rbi aims to ensure that the ltv ratio remains at or below 75% throughout the loan’s duration. this contrasts with previous practices where fluctuations were more tolerated. this sustained requirement is a focal point of concern for nbfcs.

macquarie capital, in its report, stated:

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 report

this outlook underscores the potential challenges nbfcs face in maintaining profitability and managing risk under the new regulatory framework.

interest rates and competition

in response to the rbi’s guidelines, gold loan financiers might consider adjusting interest rates. tho, the competitive dynamics within the sector, characterized by prominent players such as cholamandalam, l&t finance, and poonawalla fincorp, could limit the extent of these increases. analysts suggest that the stringent norms could lead to a deceleration in growth for these institutions in the near term [[2]].

expert opinions

suresh ganapathy, head of financial services research at macquarie capital, offers a nuanced view:

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.
suresh ganapathy, macquarie capital

ganapathy’s remarks highlight the increased compliance burden and potential growth constraints that nbfcs may encounter. the harmonization efforts by the rbi, while intended to create a level playing field, are perceived by some as a tightening of regulations, particularly for nbfcs.

market overview and future projections

the gold loan sector boasts an outstanding value of rs 3.2 lakh crore as of september 2024. the sector has experienced rapid growth, especially 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 a 27% cagr during the same period.despite this expansion,gold loans represent less than 1% of total credit for banks and approximately 4% for nbfcs.

analysts project a 12% cagr for the gold loan market through fy24-27. however, the new guidelines could moderate this growth, particularly for nbfcs. kotak institutional securities anticipates that the guidelines may reduce the maximum ltv for gold loan nbfcs and decrease the internal rate of return (irr) on loans.

impact on muthoot finance

muthoot finance, the largest gold loan provider among nbfcs, is expected to be substantially affected by the new regulations. nuvama’s research report indicates:

the rbi’s new draft gold finance norms will be negative for growth. the ltv definition has been tightened more for nbfcs than banks. moreover, ltv of 75% or less will need to be maintained through the loan life, failing which ther will be a penalty.
nuvama research report

this assessment underscores the challenges muthoot finance and similar nbfcs face in adapting to the stricter ltv requirements and potential penalties for non-compliance.