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Gold loan companies (GLCs) have brought to the notice of the Reserve Bank of India (RBI) alleged violation of the loan-to-value (LTV) ratio by some bank branches amid cut-throat competition in the loans-against-gold business.
The chief of a GLC said documentary evidence of the violation had been presented to the RBI.
“Though regulatory prescription for LTV in the case of loans against gold ornaments and jewellery is 75 per cent, some of the bank branches are offering 80-85 per cent.
“Actually, there is no point having the LTV. Lenders should be allowed to take a call on this metric, depending on their risk assessment,” the official quoted above said.
LTV is the loan amount granted against the value of the asset pledged. If the LTV is 75 per cent, a lender can grant up to 75 per cent of the value of an asset pledged by the borrower.
Loss of customers
Banks seem to have made the most of a temporary enhancement in LTV for “loans against gold ornaments and jewellery for non-agricultural end-uses” during the August 6, 2021, to March 31, 2022, period.
While the LTV for banks was increased from 75 per cent to 90 per cent to mitigate the economic impact of the Covid-19 pandemic on households, entrepreneurs and small businesses, this enhancement was not extended to GLCs.
Some customers of GLCs migrated to banks for the higher LTV. Even after the LTV was normalised to 75 per cent, the customers did not move back to GLCs as banks are offering gold loans at relatively lower interest rates.
Banks bet on gold
The AUM (assets under management) growth of GLCs has slowed even as banks stepped up gold loans, especially focused on the agriculture sector, in the last few quarters, according to industry experts.
“Historically, non-banking finance companies (GLCs) have dominated the personal gold loan space, but in FY21 banks started focusing on this space as gold was seen as a safer asset class, aided further by relaxation in LTV norms,” CARE Rating had said in a report in August.
The rating agency had then estimated the growth rate for gold loan NBFCs at 8.9 per cent in FY23 (against 7.4 per cent in FY22) and remaining moderate due to the competitive scenario from banks, especially in the higher-ticket segment.
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