IGI Logo

Domestic rating agency Crisil has said that the Reserve Bank of India’s (RBI) recent notification asking financiers to review their gold loan practices can slow down loan growth in the near-term and lead to an uptick in asset quality stress. It said potentially, this could impact gold loan disbursements during the transition phase and curb growth in the business. It can be noted that a few weeks ago, RBI had flagged certain irregular practices in loan against gold jewellery and asked lenders to comprehensively review their policies, processes and practices to identify gaps and initiate remedial measures in a time-bound manner.

According to the agency, the notification had flagged deficiencies in the monitoring of the loan-to-value (LTV) ratio, asset classification norms for overdue loan accounts, and inadequate due-diligence in monitoring the end-use of gold loans. It said reported loan delinquencies may see some uptick as entities revisit their current non-performing asset (NPA) recognition norms and/or policies and procedures for disbursing loans to existing customers. 

However, the rating agency said it was quick to add that in the gold loan business, credit cost is the more appropriate indicator of asset quality and overall credit losses are seen under control because of Indians' emotional attachment to the precious metal. It added that ability of lenders to maintain conservative LTV as well as to conduct timely auctions and recover dues also supports low ultimate credit losses.