RBI Gold Loan Rules to Moderate Sector Growth

Crisil LogoThe Reserve Bank of India’s (RBI’s) recent guidelines for the non-banking gold loan sector will significantly moderate growth and profitability over the next year, according to CRISIL Ratings.

“Business growth is likely to fall from 80 percent per annum to 20 to 25 percent per annum and return on assets is expected to fall from the currently high level of 4.5 percent to 2.5 to 3 percent,” the ratings agency projected.

RBI regulations cap the loan-to-value (LTV) ratios on lending against gold jewelry at 60 percent compared with the current average LTV ratio of around 75 percent and mandate a tier 1 capital adequacy ratio (CAR) of 12 percent by April 1, 2014. It also prohibits non-banking financial companies (NBFCs) from lending against bullion, primary gold and gold coins.

CRISIL said that the LTV cap is likely to result in significantly lower growth rates, as the borrowers will have to bring in additional jewelry to produce a loan of the pre-regulation amount. In addition, this development could result in business volume shifting to the unorganized sector, which will continue to extend loans at higher LTV ratios, the agency warned.

The currently high profitability of gold loan companies may also moderate, as these companies are likely to reduce pricing to protect their market shares and prevent a shift to the unorganized segment, CRISIL noted. However, the higher tier 1 CAR requirements are unlikely to adversely impact the sector, as the average tier 1 CAR of these companies was around 15 percent on December 31, 2011, it added. Furthermore, slower growth rates will reduce capital requirements over the medium term.

However, CRISIL noted that the RBI regulations will have an overall positive impact on the sector over the long-term. It added that lower LTV ratios will also strengthen the asset quality of gold loan companies, as the ability to absorb volatility in gold prices will now be much higher.

“Regulatory clarity and growth moderation will increase the confidence of stakeholders,’ including banks and other investors, in the sector,” said Nagarajan Narasimhan, director at CRISIL Ratings. “The regulations protect gold loan companies from the remote possibility of a unidirectional and sudden drop of up to 40 percent in gold prices over a three- to six-month period, which is the usual tenure of gold loans.”

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