Lift cap on gold loans

In the post-monetary policy briefing on April 4, the RBI governor highlighted the uneven flow of credit to MSMEs. He pointed out that bank credit growth to micro and small industries was flat at 0.6 per cent, as was credit to medium units (growth of 0.7 per cent), against overall credit growth of 14 per cent.

It begs the question: Why is it that critical sectors such as MSME are still unable to access credit? What more should regulators do to ease credit flow to small borrowers? After all, these are the people who often find themselves falling back on informal moneylenders for their credit needs. Reducing the policy rate by 25 basis points is not enough.

Credit challenges

Micro-enterprises, the backbone of the Indian economy, face challenges in raising credit from formal sources as they often lack documentary evidence of their creditworthiness. For them, the cost of the loan is not so significant as the availability of credit itself. However, banks face challenges in assessing the creditworthiness of micro-enterprises, which often work from homes, employ family members, and operate on a cash basis. How can a bank evaluate their credit requirement and repayment ability?

Presently, credit assessments rely on documentation to determine their need and ability to repay. Micro-enterprises may not have documents to substantiate their need or repayment capacity. Credit appraisal without supporting documentation is a challenge, and even more so in case of a migrant entrepreneur.

Gold loan is one credit product which addresses all such impediments. It is available without the requirement of rigorous documentary proof. One can borrow against the family gold jewellery even without income proof. It can be taken even for a day, which makes it ideal for temporary mismatches in cash flow. Often, small entrepreneurs require credit for short periods which banks find difficult to service due to longer processing time and small ticket size. In contrast, gold loans, especially from the NBFC providers, are disbursed in minutes, saving valuable time for a micro-entrepreneur.

Current RBI regulations restrict the maximum loan amount to 75 per cent of the value of the gold. Even though gold loan NBFCs are willing to give out a higher loan, they are prevented by the loan to value (LTV) cap on gold loans. This, unfortunately, nudges vulnerable borrowers towards unregulated moneylenders who don’t have to follow LTV restrictions, surely an outcome that regulators would not have wanted. A step backwards after a wrong turn is a step in the right direction. Now is the time for regulators to do away with the LTV restriction in the interests of marginalised borrowers.

Of course, having done away with the LTV restriction it becomes necessary to think of ways to check unhinged lending. Here, a prudential approach would be to assign higher risk weight on the proportion of the loan over and above 75 per cent of collateral value to ensure gold loan lenders don’t go overboard.

A blanket cap on LTV applicable to one and all pulls everyone down to the lowest common denominator denying due competitive advantage to the better managed, better capitalised players.A shift towards risk-weighted capital requirement is, therefore, the logical next step needed to ensure improved access to credit for micro-enterprises.

The writer is MD and CEO, Manappuram Finance.

The views are personal

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