RBI’s latest guidelines on gold loans likely to impact lending practices: Report

RBI’s updated gold loan regulations are set to transform lending practices, with S&P Global Ratings noting that agile lenders stand to benefit. Key changes include stricter LTV calculations and mandatory cash flow-based appraisals, posing operational and compliance challenges for NBFCs

New Delhi: The RBI’s latest directions on gold loans will change India’s landscape for this booming lending segment, with lenders nimble enough to adjust their business model standing to gain, according to an S&P Global Ratings report released on Thursday.

The report is of the view that lenders will have more latitude to offer shorter-tenor loans for gold-backed consumption loans, allowing smaller borrowers to unlock more value from their pledged gold assets.

---

It also highlights that operational agility and service excellence will remain the key differentiators between lenders. Lenders have time until April 1, 2026, to prepare for the changes. The report identifies two elements of the new rules as the most notable.

The first is the inclusion of interest payments until maturity in the calculation of loan-to-value (LTV) ratios. This effectively could limit the upfront loan amount disbursed, something which lenders will try to overcome as this goes against typical borrower preference.

The second is the application of credit appraisal based on borrowers’ cash flow analysis for consumption-focused loans above $3,000 and all income-generating loans. According to the report, the adjustment to credit appraisals will be bigger for the Non-Bank Financial Companies (NBFCs) with dominant gold-based loan books, such as Muthoot Finance Ltd. (BB+/Stable/B) and Manappuram Finance Ltd. (BB-/Stable/B).

NBFCs need to develop risk management policies and processes to evaluate borrowers’ repayment capabilities based on cash flows. Traditionally, they have relied on collateral valuation. Bridging the skill gaps to hire and train loan officers on assessing repayment ability is both an upfront cost and a hurdle to overcome for these lenders, the report points out.

The report highlights that nimble adjustments in models are likely. It expects lenders to gradually increase the proportion of shorter tenor products with three-month and six-month maturities. From a customer retention point this is important to lenders.

The shift would benefit low to middle-income borrowers by enabling them to receive larger upfront loan disbursements against their pledged collateral, given the new LTV settings, the report states.

The report is of the view that the Reserve Bank of India’s latest rules provide clarity on the renewal of loans and will support this shorter tenor model.

The rule now mandates that renewal is only subject to full repayment of the interest. In the past, NBFCs such as Manappuram Finance saw shorter tenor models run into regulatory headaches and being discontinued.

The report also anticipates increased traction in income-generating loans. As LTV norms may be less binding, it is expected that some lenders’ appetite to expand these loans in their portfolio will increase. Income-generating loans would typically be based on regular interest servicing structures.

According to the report, even as lenders experiment with new models, the real differentiator will remain the ability to disburse loans quickly and seamlessly. These are longstanding attributes of NBFCs operating in this niche segment.

Against this, in an evolving landscape, the NBFCs’ strong customer relationships and investments in people and advanced analytics could help them stay competitive, the report added.