The newly framed provisions are expected to lead to a reduction in the effective LTV of the product by providing for additional buffers in light of gold price fluctuations and interest accrual. NBFCs, given their higher share of bullet repayment loans, are expected to witness a decline in disbursal volumes by about 5-10 percent.
1. Loan-To-Value (LTV) Limit
The loan amount would never be more than 75% of the gold's value for the entire loan duration.
2. Bullet Repayment Loans
For loans where the borrower repays the entire amount (loan + interest) at the end, this interest must also be included in the computation of the LTV. At present, however, only the loan amount is taken into account.
3. Stricter Monitoring and Checks
Lenders will have to monitor how borrowers utilize their loans; perform the needed credit check; and fall into stricter rules for different types of gold loans, such as for personal use or business.
A. Lower Loan Amounts
For the same amount of gold, NBFCs should give smaller loans as interest has to be included in LTV.
B. Possible Decline in Business
Experts predict that there might be a drop of 5% to 10% in gold loan disbursals.
C. Increased Costs
The new regulations may bring about a great deal of documentation, more compliance costs, and delayed processing.
D. Losing Customers
Some of the borrowers may tend to go to the local money lenders, who have not been subject to such strict conditions.
The banks are already having the rules which are more or less similar, and thus they won't be impacted at all.
Gold loans constitute a very small part of total bank lending, which leads to minimal impact.
As of September 2024, there are gold loans in India amounting to ₹3.2 trillion.
From FY20 to the first half of FY25, the market grew at a CAGR of about 27% per annum.
During this period, banks grew their gold loan portfolio faster than that of NBFCs.
With these new rules, the gold loan market is going to slow down and grow at about 12% per year for the period FY24 to FY27.
NBFCs that focus heavily on gold loans will obtain slow growth with lower profits and greater competition.
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