The Association of Gold Loan Companies has requested the Reserve Bank of India to look into violations by some banks’ branches of the norm that caps the amount of loan that can be given against the pledge of gold ornaments and jewellery.

This comes against the backdrop of banks’ sustaining their focus on growing their gold loan portfolio even after the RBI’s temporary relaxation (from August 6, 2020, to March 31, 2021) in the LTV (loan-to-value) norm ended.

“We have taken up the matter with the regulator because some of the banks (both public sector and private sector) and some of their branches are violating the LTV norm,” said George Alexander Muthoot, Managing Director, Muthoot Finance.

He emphasised that the 75 per cent LTV norm (that is the loan amount cannot exceed 75 per cent of the value of the pledged collateral) is uniform across Banks and non-banking finance companies (NBFCs).

The RBI had increased the permissible LTV for loans sanctioned by banks against pledges of gold ornaments and jewellery for non-agricultural purposes to 90 per cent from 75 per cent in August 2020 to mitigate the impact of COVID-19 on households. This relaxation in LTV was available only till March 31, 2021.

Gold loans exceeding LTV norm

“Some of the Bank branches are lending gold loans up to 80-90 per cent (of the pledged gold ornaments and jewellery). This is something that the bank branches are violating,” Muthoot, who is also President of the Association, said.

He also flagged the issue of customers without agricultural activity taking agricultural loans.

“These are all bank/branch-specific cases that add to their business,” Muthoot said.

Banks’ are now focussing more on agriculture gold loans as it gives them the benefit of priority sector lending classification and recovery in case of default is relatively easier. Growth in gold loans in the non-agriculture segment continues apace.

Gold loan growth

According to a CRISIL Market Intelligence and Analytics (MI & A) Research report, gold loan finance saw a CAGR (compounded annual growth rate) of 15 per cent between fiscal 2018 and 2022, led by stable gold prices and a surge in gold loan offtake from NBFCs during the pandemic.

Credit growth is estimated to have moderated to 5-7 per cent in fiscal 2023 before recovering to 10-12 per cent in fiscal 2024, per MI&A’s assessment.

As of March-end 2022, banks’ and NBFCs collectively had an outstanding gold loan of ₹5,09,400 crore, the report said. Of this , banks’ and NBFCs shares stood at 78 per cent and 22 per cent, respectively.

“The competitive position of banks resulted in them capturing a major share of the segment, which led to growth moderating for NBFCs.

“That said, NBFCs are expanding their reach and clientele to regain their market share amid fierce competition from banks and new age fintech companies through focused market strategies, increased advertising costs, and better employee benefits,” the report said.

CRISIL MI&A opined that NBFCs are working on retaining their high-value customers (loans greater than ₹2 lakh) who are being targeted by banks, along with expanding to cater to rural low-income groups.

Lenders’ LTV ratio can be supported by gold prices firming up amid inflation, global slowdown, rupee depreciation, and increased import duty domestically, creating headroom for credit growth, it added.

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