MC EXCLUSIVE Lenders flag off on draft gold loan guidelines to RBI

gold-loan

Lenders are said to have raised concerns to the Reserve Bank of India (RBI) over the draft guidelines on lending against gold collateral.

Sources said that these guidelines are expected to have an impact on the financials of lenders. The industry also fears that it may lead to delays in disbursements, ending the 15-minute gold loan disbursement schemes.

"The efficiency and quick turnaround of loans which the industry strived to bring about in the last 4 - 5 years may completely go away, if the draft norms are adhered to," said a chief executive of a lender who didn't want to be named.

Industry players have also asked the central bank to relook a few guidelines on these lines before releasing the final norms, sources said.

“The RBI’s draft norms want lenders to do all the underwriting before sanctioning loans. Earlier, there were some leniency on underwriting. These lenders are fearing that it will add more time to the process,” said another source.

According to the RBI’s draft guidelines, lenders have to include an appropriate single borrower limit and sectoral limits for the loan portfolio extended against gold collateral, put in place a mechanism to ensure the end-use of loan, Loan-to-Value (LTV) ratio, valuation standards of gold and norms, and standards pertaining to gold purity.

The draft guidelines also expect lenders to seek a detailed trail of documentation, including income proof, for credit underwriting. Under the draft framework, lenders will be required to track the end-use of loans.  In all, the fear is that the process of sanctioning and disbursing gold loans may become very cumbersome, taking away the efficiencies which most players brought into the system in recent years.

At present, gold loans run on the basis of collateral itself, without much reference to the underlying cash flows of the customer.

An email sent to RBI, seeking confirmation on the nature of queries put forth by the industry, remain unanswered till the time of publishing this story.

Further, sources said that lenders may follow the process stated by the RBI in the draft circular for large ticket-size loans, but for small-ticket loans, which covers a vast majority of small borrowers, lenders may follow the old process.

Under the draft norms, all loan renewals and top-up loans can be sanctioned only if the existing loan is classified as 'standard', and there is headroom available within the permissible LTV ratio.

In other words, the proposed guidelines seek to end the vicious and extremely prevalent practice of loan rollover, irrespective of whether the borrower is a performing or non-performing asset.

The draft clarified a long-standing ask of the industry to permit paper gold to be used as collateral. The draft norms reiterate that lenders shall not grant any advance against primary gold or silver, backed by similar units of Exchange-Traded Funds (ETFs) or mutual funds.