KOCHI: The Reserve Bank of India’s proposed guideline requiring gold loan providers to maintain a 75 per cent loan-to-value (LTV) ratio on an ongoing basis has raised alarm across non-banking financial companies (NBFC).
While the rule applies across the board, banks are permitted some flexibility – gold loans extended for income-generating activities are exempt from strict adherence to the 75 per cent cap throughout the loan tenure
NBFCs, however, are not allowed such a relaxation, putting them at a competitive disadvantage.
Several top NBFC executives say the new rule is impractical and could make their gold loan offerings financially unviable.
Maintaining the LTV cap of 75 per cent consistently is particularly challenging in bullet repayment structures, where loans are repaid in one go.
To stay within the limit, NBFCs say they would have to originate gold loans at an LTV of around 60 per cent, which borrowers – often financially stressed individuals – are unlikely to accept.
This may push many of them towards moneylenders in the unorganised sector who offer higher LTVs without regulatory checks.
Margin calls impractical
NBFCs also argue that making margin calls to borrowers whenever the LTV exceeds 75 per cent due to accrued interest or a fall in gold prices is not practical.
As a result, NBFCs fear losing a significant chunk of their gold loan business – both to informal lenders and to banks.
George Alexander Muthoot, Managing Director of Muthoot Finance, said the guidelines, if enforced in the current form, would drive up compliance costs and weigh down average assets under management per branch, especially for smaller players.
Karur Vysya Bank CEO B Ramesh Babu said the proposed norms could boost banks’ market share at the expense of NBFCs. “Our gold loan portfolio rose 61 per cent in FY25 amid shifting borrower preferences,” he said.
The Association of Gold Loan Companies (AGLOC) has already flagged its concerns to the RBI, while reports suggest Finance Minister Nirmala Sitharaman has urged the central bank to consider the hardships faced by millions of Indians who rely on gold loans to meet urgent financial needs.
