Operations of gold loan non-banking finance companies, especially the transactions between them and their respective sister concerns, need careful monitoring, according to the Reserve Bank of India.
Gold loan NBFCs have unincorporated sister concerns to undertake financial activities, which are not permitted by the regulator. Such activities primarily involve raising public deposits and diverting these funds towards the registered gold loan NBFC.
The RBI’s working group on issues related to gold imports and gold loans by NBFCs said raising public deposits by such illegitimate means can have implications for public confidence in the NBFCs concerned and the non-banking financial sector as a whole.
“If such activities are not curbed in time, they can threaten the stability of the financial system. There is a need for monitoring transactions between gold loan NBFCs and unincorporated bodies,” the group said in its report.
The report said the rapid growth of assets, borrowings and branch network of gold loan NBFCs needs to be monitored continuously through frequent review of relevant data.
There is also a need to reduce the interconnectedness of the gold loan NBFCs with the formal financial system over the medium to long run, said a RBI panel.
Keeping in view the declining capital adequacy ratio of the NBFCs, there is a need to improve their capital.
NCD route
The current stipulations pertaining to raising resources through non-convertible debentures (NCDs) need to be reviewed. Many of the gold loan NBFCs have resorted to NCDs in the recent past to enhance their working capital funds.
Further, the exemption available to secured debentures from the definition of ‘deposit’ may be reviewed.
The auction of gold (loan defaulters’ gold collateral) by the NBFCs needs a relook. Auctions should be conducted at a price closer to the market price.
The RBI panel said there is no case for conceding complete level playing-field for gold loan NBFCs with banks.
Rationalisation of interest rate structure of these NBFCs should be a priority.
Much of the loan portfolio of these NBFCs are at an average interest rate of 24-26 per cent and only 2 per cent of their portfolio is at 12 per cent.
The RBI said, as of now, the gold loan NBFCs do not pose a problem for financial stability. Going by the past trends, a drop in gold price by 30-40 per cent is a remote possibility causing financial distress to the gold loans NBFCs.
Currently stable
The emotional or sentimental attachment of gold jewelleries to the owners is considered to be the greatest guarantee against any default in gold loan business in India.
Ever increasing price trend of gold in recent years also acts against any attempt to default by borrowers as any default will only result in a loss of value for the customers. Therefore, the level of defaults or non-performing loans is negligible in these segments at around 0.4-0.5 per cent.
The practices followed by gold loans NBFCs need a relook to ensure customer protection. In this regard, there is a need to ensure transparent communication of loan terms. Institution of a customer complaint and grievance redressal system is important, said the report.