It is strange and good to find elephant dancing;
Yes, RBI is proactive this time.
Reserve Bank of India ( RBI) has come out with rugulatory guidelines for Gold Loan NBFCs on March 21, 2012. Surprisingly, this is even before any scam by any unscruplous finance company.
No doubt that gold is a good underlying asset; but, there is a huge operational and market risk running a gold loan company. Operation risk is manageable and is within the influence of the management of these NBFCs. Market risk is unmanageable, hence regulatory guidlines.
No wonder, this business has been dominated by Marwaris as a family business; a family member is responsible for evaluation, grading, LTV and storage of collaterals. The interest rates and LTVs are decided by the community informally; they know full well the risk involved in this business. Believe me, their interest rates are simple and is lower than the rates charged by many Gold Loan NBFCs.
Their service accessibility is 24 X 7 X 365; NBFCs may not be able to match here. Ones that match would do too well.
More importantly, Marvaris do not have the problem of "managing" NPA.
Collection problem is zero though losses may still happen due to many other reasons, maily while realising the value from the pledged but high delinquent ( NPA accounts).
Advantage with Gold Loan companies has been "high LTV". This is precisely the risk.
Gold prices had been increasing for the past 11 years and at increasing rate in the past two years. With fear of global recession receding and Europe's crisis is being solved, the gold can retreat upto
20-30% from the recent peak. Hence, the guidline of LTV not to exceed 60% is welcome and an important feature.
But, it is perflexing as to why RBI banned loans on bullion / primary gold and gold coins by NBFCs. Are NBFCs expected to achieve any social objectives? Is RBI looking at as a high potential fraud area?
And what is the reference rate for gold for valuation of gold jewellery which are made at varying karats? This is bigger risk than LTV. Will RBI address this ever?
Why are banks allowed to take risk (no restriction on LTV)?
And, where is the level playing field?
RBI / 2011-12/467
DNBS.CC.PD.No.265/03.10.01/2011-12 March 21, 2012
To
All NBFCs
Dear Sir,
Lending Against Security of Single Product – Gold Jewellery
It is observed that NBFCs that are predominantly engaged in lending against the collateral of gold jewellery have recorded significant growth in recent years both in terms of size of their balance sheet and physical presence. This in turn, has led to their increased dependence on public funds including bank finance and non-convertible debentures issued to retail investors.
2. Given the rapid pace of their business growth and the nature of their business model, which has inherent concentration risk and is exposed to adverse movement of gold prices, as a prudential measure, it has been decided that all NBFCs shall
i. hereafter maintain a Loan-to-Value(LTV) ratio not exceeding 60 percent for loans granted against the collateral of gold jewellery and
ii. disclose in their balance sheet the percentage of such loans to their total assets.
3. NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50 percent or more of their financial assets) shall maintain a minimum Tier l capital of 12 percent by April 01, 2014.
4. NBFCs should not grant any advance against bullion / primary gold and gold coins.
5. Copies of Amending Notifications No. DNBS.241/CGM (US)-2012 and DNBS.242/ CGM (US)-2012 of date are enclosed for meticulous compliance.
Yours sincerely,
(Uma Subramaniam)
