Crisil, a domestic rating agency, on Tuesday said the recent notification issued by the Reserve Bank of India (RBI) asking financiers to review gold loan practices could lead to slower loan growth and asset quality stress in the near future. There may be an increase. According to PTI news, Crisil said in the note that potentially, this could impact gold loan distribution during the transition phase and prevent growth in business.
Asked to conduct a comprehensive review of processes and practices
According to the news, it is worth noting that a few weeks ago the RBI had identified certain irregular practices in loans against gold jewelery and asked lenders to review their policies, procedures and practices to identify the gaps and initiate remedial measures in a timely manner. Had asked for a comprehensive review of the practices. The notification had flagged deficiencies in monitoring the loan-to-value (LTV) ratio, asset classification norms for overdue loan accounts and inadequate due diligence in monitoring the end-use of gold loans.
Some increase may be seen in loan defaults
CRISIL said some increase in reported loan defaults may be seen as institutions are re-thinking their existing non-performing asset (NPA) recognition norms and/or policies and procedures for disbursing loans to existing customers. However, it was quick to add that in the gold loan business, loan cost is a more appropriate indicator of asset quality and overall loan losses are seen under control due to Indians’ emotional attachment to the precious metal.
There may be a decline in gold loan growth in the next few quarters
CRISIL director Malvika Bhotika said the regulations are aimed at ensuring consistent application of guidelines in the gold-loan sector and protecting the interests of the borrower. Bhotika said non-compliance is likely to impact disbursements over the next few quarters and dampen gold loan growth for both banks and NBFCs. The senior official said NBFCs are expected to adapt to the regulatory measures affecting their business within a reasonable time-frame, as has been the case in the recent past when limits on cash disbursement were imposed.
