Lenders are likely to go slow on growing their gold loan book, and foresee a fall in returns from this product, as they focus more on meeting higher compliance standards after the Reserve Bank of India (RBI) on Monday flagged violations by certain lenders in extending gold loans.
“The way this business runs, there is a lot of informality which occurs because the segment which borrows this money, mainly in the ₹60,000-₹1 lakh ticket size, is in dire need and will accept whatever terms are being offered,” said a senior private sector banker.
He said that valuation of gold loans is a clear issue, wherein it is not known whether all lenders assess purity of gold in accordance with norms. Secondly, if a lender is renewing the gold loan for a very long period, chances of evergreening increases.
“There are bad practices of multiple loans being extended on the same PAN number. Does that mean that one borrower is taking multiple people’s jewellery and securing loan under the same PAN number? In this segment, there can be a lot of forced issues,” the banker said. Then comes the pricing issues, where in case of a delay in payment, gold loan companies charge borrower a rollover fee.
“Now lenders will have to improve practices; it will take a temporary knock for not just three months but a longer period. If these stringent norms are implemented -- on one person one loan, and renewal of loans and pricing being based on certain diligence -- I think there will be some impact on volumes and practises,” he said.
The gold loan co-lending or other partnerships between banks and fintechs or business correspondents (BCs) will also be affected as usually the third party would assess the purity of loan themselves and then store gold with banks and NBFCs. Now if assessing purity of gold has to be done at the bank level and in front of customer, the cost will rise. A lot of lenders, who entered gold loan business thinking it is a low-risk and high-reward business, will moderate their growth plans, and return on asset will fall as cost rises.
RBI’s action
The RBI on Monday flagged irregular practices in gold loan sanctioning and servicing by certain lenders, including evergreening of loans, shortcomings in usage of third parties for sourcing and appraisal of loans, and assessing valuation of such loans without the presence of customers, among others.
“Tightening of these processes may affect growth, asset quality recognition at gold financiers,” global brokerage Jefferies said.
“While we await more clarity from our covered gold NBFCs, we note that traditional gold financiers like Muthoot, MGFL (Manappuram Finance) have been audited by RBI, periodically, and thus may have fewer gaps. IIFL Finance should also be unaffected, as it has already taken corrective measures and has recently been allowed to restart gold loans post RBI audit,” it said.
A senior executive at a private bank said the RBI’s directions has not taken the bank by surprise, as the lender has been careful about assessing, compliance and due diligence. The bank is also in constant conversation with the RBI as the regulator conducts routine inspections.
“I don’t see too much of an issue, but because there is a formal note by the RBI and we have to reach out to the regulator with processes undertaken to ensure compliance, we will further strengthen our audit processes. A very physical, touch-and-feel business like this needs to be governed and audited frequently,” he said.
Overall positive for industry
Another senior official at a public sector bank said some of the issues flagged by the RBI may be with banks, but largely they are flagged with regards to gold loan NBFCs, especially in two areas — valuation being done in absence of borrower and auctioning of gold without proper valuation.
“RBI has been raising some concerns for a while. If you see, some concerns were raised by the DFS as well in December-January. DFS gave certain guidelines to banks with regard to assaying purity of gold and most banks have done that exercise,” he said.
A CFO of a large NBFC said that while growth in gold loan business will slow down due to higher scrutiny of the regulator, the RBI’s attention and certainty in regulation is actually a positive, as it will help honest players grow and also allow greater proactive compliance from players.
“For a long time, most players were operating in the grey areas playing certain violations as industry norms. A well regulated thriving gold loan industry will go a long way in firing India’s unbanked and under-banked sector,” he said.