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A week after the RBI ban on IIFL Finance’s gold loan business, the NBFC industry is in the process of finding an alternative for cash channels in dealing with these loans, particularly with respect to disbursements.
According to sources, Bajaj Finance may have halted disbursement of gold loans of more than ₹20,000 in cash. Calling it a precautionary measure, as of March 9, the lender is said to have communicated to its branches that any cash disbursements in gold loans should be restricted to ₹20,000 and any sum above this must be disbursed to the bank account of the customer.
Other key NBFCs in the segment are also changing their disbursement model. However, the industry fears that this change may lead to some disruption to the gold loan business model. For banks, the impact may be negligible.
GREY AREA
The cash cap of ₹20,000 is an income tax related issue; not a diktat from the Reserve Bank of India (RBI). Sections 269SS and 269T of the Income Tax Act restrict cash repayment and payment of loans and deposits at ₹20,000.
Anything paid or received in excess of this limit can be fully taxable unless the assessing officer waives the penalty. However, banks are exempt from these provisions. Nonetheless, certain other provisions pertaining to cash transactions have a higher threshold starting from ₹20 lakh.
Also read: Gold loan companies request RBI to probe banks violating loan-to-value norms
“This has been a contentious issue especially in the recent years. NBFCs have approached the RBI to ensure there is level playing field with banks,” said the CEO of a gold loan NBFC, who didn’t want to be named. However, with elections round the corner, sources say the regulator may have stepped up supervision on this segment.
NOT BUSINESS AS USUAL
Gold loan NBFCs fear that the curbs imposed on IIFL may see the end of 15-minute and quick gold loan schemes (popular NBFC products).
“This is the moat NBFCs enjoyed over banks, because we were able to assess and lend quickly in a manner most convenient to the borrower. This also why NBFCs are preferred over banks in the gold loan business, especially for amounts less than ₹5 lakh,” said the CEO of another gold loan company. With curbs on cash coming into play, NBFCs’ advantage over banks is set to go.
Also read: FIDC issues advisory to NBFCs amid successive regulatory actions
Also, “some of our borrowers may have a bank account, but it may be attached to another loan account where he may not have been up to date with EMI payment.
These customers prefer cash over bank account credit,” said the CEO of yet another gold loan company.
SPEED IS THE KEY
Sources also point out that with gold loans being an emergency product and invariably the first or second loan product for a borrower outside of metros, not all borrowers may not have a bank account. “If we have to open an account for such customers and credit the disbursement to the account, it’s a one-day, not a 15-minute, process,” said a senior executive of a gold loan NBFC.
Banks, on the contrary, prefer to extend gold loans to their existing customers, hence seldom face such issues.
Muthoot, Manappuram, IIFL Finance, Capri Global, and ITI Gold Loan Ltd are the key NBFCs in the gold loan segment.
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