Repo Rate Cut Is Bound To Impact Gold Loan Segment

Even as Reserve Bank of India (RBI) is mulling to roll out gold loan rules, experts believe that the 25 basis points repo rate cut, the second such move in succession, will have a major impact on the gold loan segment.

Loans against the collateral of gold jewellery and ornaments, commonly known as gold loans, are extended by regulated entities, including banks and NBFCs, for both consumption and income generation purposes.

“In order to harmonise guidelines across regulated entities to the possible maximum extent, keeping in view their differential risk bearing capabilities, we shall issue comprehensive regulations on traditional norms as well as conduct related aspects for such loans”, RBI governor Sanjay Malhotra said.

While we await the details, guidelines to harmonise gold loan practices across lenders augurs well for the segment, given the sharp growth in loan book driven by the gold prices and favourable demand dynamics, as unsecured and personal credit slowed since H2FY2024.

Talking to Bizz Buzz, Rajesh Rokde, Director of Rokde Jewellers, Nagpur, and Chairman of All India Gem and Jewellery Domestic Council, said, “There is a hike in the interest rate on B2B gold loans up to 7.5 per cent in recent times due to geo-political tension, hence traders are directly moving towards cash credit.”

The existing guidelines on co-lending are applicable only to arrangements between banks and NBFCs for priority sector loans. Although co-lending is a win-win situation for all parties the current model is still under examination. The expansion of co-lending to all regulated entities is a welcome move but exact details are needed to gauge the impact and the scope of this new arrangement.

The recent spurt in gold loan portfolio coupled with increase in gold prices and volatility, indicates that regulatory intervention on account of fear of loan to value limit breaches is a natural step.

Many lenders, regulated and unregulated, presently follow different loan matrix on Loan to Value (LTV), interest rate and distribution channels.

The central bank will revisit and issue comprehensive regulations on prudential norms and conduct related aspects, for gold loans.

A.M. Karthik, SVP & co-group head, Icra, said, “With the elevated gold prices and the prevailing favourable risk profiles of NBFCs in this space, considering the liquid nature of the security, the near-term impact on account of regulatory tightening should be manageable.”

However, competitive pressures for NBFCs could increase going forward, which can also be effectively monitored.