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Amid surge in biz, RBI asks gold loan NBFCs to strictly comply with norms

Mumbai, May 15, 2024

RBI took stock of the gold loan business of non-banking finance companies after one of them - IIFL Finance faced regulatory restriction for violating norms

The Reserve Bank of India has asked the non-banking finance companies to comply with norms on loan-to-value ratio, auction process, and cash disbursement after some of these companies were found to be in violation of regulatory guidelines.

According to sources, the regulator took stock of the gold loan business of non-banking finance companies after one of them – IIFL Finance – faced regulatory restriction for violating norms.

Gold finance companies' business recorded phenomenal growth since the Covid-19 pandemic, which jumped from Rs 34,678 crore in March 2020 to Rs 1.31 trillion in March 2023, according to Reserve Bank of India data.

Last week, in a communication to gold loan non-banking finance companies, the regulator asked them not to disburse more than Rs 20,000 in cash, citing the provisions of the Information Technology Act.

One of the concerns was related to higher cash disbursement than what the norms stipulate.

Sources said many gold finance companies were in violation of the cash disbursement component as they were extending 40-50 per cent of the loan amount in cash. The average ticket size of gold loans is around Rs 50,000 for most companies.

“There were breaches in the past, maybe by a small margin which the regulator was fine since that was within the permissible limit. However, now they are emphasising strict adherence to the norms,” said a source.

In March, the Reserve Bank of India had barred IIFL Finance, a non-banking financial company, from sanctioning and disbursing fresh gold loans following “material supervisory concerns” and to protect the interests of customers.

Similarly, the loan-to-value cap for non-banking finance companies is set at 75 per cent. The regulator has asked these firms to strictly adhere to the cap. 

Reserve Bank of India governor Shaktikanta Das said the regulator asks entities to take corrective steps whenever there are violations.

“I would like to say that our supervision machinery in Reserve Bank of India, either for banks or non-banking finance companies or lenders, we regularly do the supervision for them. Wherever we see there is some major deviations in some compliance and in regulatory requirements, first our intent is to deal directly, bilaterally with them, sensitise them, to work with them and to impress upon them to take corrective action,” Reserve Bank of India governor Shaktikanta Das during the April monetary policy press conference when asked about recent restrictions against non-banking finance companies.

“While working with them, when progress is not up to the mark, then on top of that, we apply supervisory restrictions, but as a part of supervision, we regularly supervise the system and review the major players. So, I would not like to say that this is a system-wide problem because we have supervised every entity. We take action in outlier cases,” Das added.

Auction of gold due to non-payment is another area where the regulator has sensitised the non-banking finance companies to follow a transparent process.

Sources said the Reserve Bank of India insists that the individual whose gold is auctioned should be aware of such a process being initiated. In addition, the auction should be conducted at the ‘Taluka’ level so the person can be physically present during the auction.

NBFC advances to indivdual against gold

  Rs Crore
End March 2020 34678
End March 2021 94840
End March 2022 119311
End March 2023 131165

Source: RBI

[The Business Standard]

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