Lenders have sought relaxations on the Reserve Bank of India’s proposed loan against gold collateral norms, saying apart from posing operational and commercial issues, the guidelines may push lower income borrowers to informal money lenders.
According to the draft norms, lenders shall not extend loans where ownership of the collateral is doubtful. In case the original receipts of purchase of gold are unavailable, a document obtained from borrower shall be prepared explaining how the ownership of the collateral has been determined, which bankers say is challenging in nature. For bullet loans, loan-to-value (LTV) ratio has been proposed to be computed by treating the total amount repayable by the borrower at maturity rather than the loan sanctioned at origination. Unlike traditional loans, bullet loans enable borrowers to re-pay entire principal and interest on the loan at the end of maturity period.
Industry representation
Chetna Gala Sinha, Founder of Man Deshi Mahila Sahakari Bank, which caters to rural women borrowers, said gold loans are prevalent globally because they don’t attract incremental collateral, are hassle free and typically used as emergency loans by lower-income borrowers.
“…Gold loan is one of the most utilised products in rural India by lower income group borrowers. If we have stringent regulations, borrowers will go back to money lenders where they get immediate money. Borrowers must be able to easily self-declare their ownership of gold as in many a cases the gold is ancestral in nature, and their income level can also be self-certified. Gold is a very liquid asset which poses no security issue to lender. Borrowers are very attached to their gold too…,” Sinha said.
Another senior official at a gold loan NBFC said change in loan-to-value (LTV) computation for bullet repayment loans is a huge setback for borrower and not lender. “If we include the total interest payable in the LTV calculation, the lendable loan amount drops sharply, by around 15 per cent. This shift undermines the immediate liquidity gold loans are meant to provide,” the source said.
They agreed with Sinha’s view that if a borrower requires a small ticket loan for her small business or other pressing urgent needs, the inability to produce just in time formal income proof or justifying the exact end-use should not become a barrier. The gold loan industry already follows strict KYC norms and maintains collateral transparency and additional documentation will slow down lending and hike operating costs.
The banker suggested retaining the current LTV calculation method for bullet loans and accepting borrower declarations for their repayment capacity and end-use for smaller ticket size gold loans. The RBI did not respond to businessline queries till press time.
Pointers:
Per guestimates, over 65 per cent of gold loan customers have no formal income documentation.
According to draft norms, lenders shall not extend loans where ownership of the collateral is doubtful.
Proposed norms if brought in effect fully, may leads to more NPAs, asset runoff, and provisioning pressures.