How RBI's New Gold Loan Guidelines Will Transform Lending in India
RBI's Impact on Gold Loans
New Delhi: Recent guidelines from the Reserve Bank of India (RBI) are set to reshape the gold loan sector in India, as highlighted in a report by S&P Global Ratings released on Thursday. The report suggests that lenders who can swiftly adapt their business strategies will be well-positioned to benefit from these changes.
The new regulations will allow lenders to provide shorter-term loans for gold-backed consumption, enabling smaller borrowers to access greater value from their pledged gold.
Operational flexibility and high-quality service are expected to be crucial factors that distinguish lenders in this evolving market.
Lenders have until April 1, 2026, to align with the new regulations, which introduce two significant changes.
Firstly, the calculation of loan-to-value (LTV) ratios will now include interest payments until the loan's maturity. This could potentially restrict the initial loan amounts disbursed, which may conflict with borrower preferences.
Secondly, credit assessments for consumption loans exceeding $3,000 and all income-generating loans will now be based on an analysis of the borrower's cash flow.
The report indicates that Non-Bank Financial Companies (NBFCs) with substantial gold loan portfolios, such as Muthoot Finance Ltd. and Manappuram Finance Ltd., will face the most significant adjustments to their credit appraisal processes.
These NBFCs must establish robust risk management frameworks to evaluate borrowers' repayment capabilities based on their cash flows, moving away from the traditional reliance on collateral valuation.
The report emphasizes that lenders are likely to make agile adjustments to their models, gradually increasing the share of shorter-term products with maturities of three and six months, which is vital for customer retention.
This shift is expected to benefit low to middle-income borrowers by allowing them to secure larger upfront loans against their collateral due to the revised LTV ratios.
The RBI's new rules also clarify loan renewal processes, now requiring full interest repayment for renewal. Previously, shorter-term models faced regulatory challenges, leading to their discontinuation.
The report anticipates a rise in income-generating loans, as the new LTV norms may encourage lenders to expand their portfolios in this area, typically structured around regular interest payments.
Ultimately, while lenders explore new models, the ability to process loans quickly and efficiently will remain a key differentiator, a hallmark of NBFCs in this niche market.
In this changing environment, strong customer relationships and investments in personnel and advanced analytics will be essential for NBFCs to maintain their competitive edge.