There are multiple ways to start gold loan business, at start-up level you can start with money lending license or Nidhi Company etc before finally jumping to gold loan NBFC license by RBI.
Gold is one of the most influential financial instruments in India. Banks, NBFCs and unorganised lenders are actively engaged in providing loans against gold value. These loans have played a vital role by providing liquidity for an idle asset kept in the lockers.
However, in its latest move, the RBI has come up with a norm for NBFCs that does not allow them to offer a loan above 60 per cent of the value of gold.
The central bank has been uncomfortable with the high growth rate of gold loans for NBFCs and has increased its inquiry of the gold loan portfolios, even for the banks.
The RBI wants interest rates and growth rates on gold loans to come down, especially for NBFCs, considering concentration risk and the risk of a fall in gold prices.
Furthermore, the RBI’s directive that a bank credit to NBFCs for giving loans against gold jewellery will not be treated as exposure to the agricultural sector would hinder companies to raise easy funds for gold financing.
Some of the key points from the RBI’s latest guidelines for NBFCs include transparency in interest rates, due diligence in understanding the repayment capacity of the borrower, awareness of his existing debts, explicit loan agreement, and so on.
Also, NBFCs that have gold loans of more than 50 per cent of total financial assets have to maintain Tier-1 capital ratio of 12 per cent from April 2014.
A setback for NBFCs
The RBI’s guideline is a setback for NBFCs because the new rules require greater capital adequacy for the financing companies and the threshold for the value of loan against gold is proposed to be at a lower value.
This would mean that ornaments of the same value are expected to result in a lesser loan amount and that too at a slightly higher cost.
Let’s check out other aspects where NBFCs could be affected. Earlier, NBFCs used to provide up to 80 per cent loan against the gold; now, it would be reduced to a mere 60 per cent of the gold value.
Gold loans from banks would now become more attractive than NBFCs until they are allowed to lend more on the value of pledged gold.
The cost of funding for NBFCs would go up due to the RBI’s restriction to banks to club advances to NBFCs to finance gold loans along with other agricultural loans. Banks will now have to lend to NBFCs at higher rates of interest.
NBFCs might also have to reduce the interest rate to sustain hold in the gold loan market. Hence the profit margin would come down significantly.
Cost of funding
Though this regulation would hit the revenue as well as bottom-line of the NBFCs there some positive aspects to this move:
A point in favour of NBFCs is the fact that they already have a deep presence in the gold loan market. At present, NBFCs have a 32 per cent share of the total gold loan market. The gold loan would still be cheaper than the personal loan; so, the size of market is set to grow bigger in coming days.
There are many untapped localities where NBFCs could have a better reach than the banks.
The advantage of trouble-free and quick loan processing by NBFCs would give them the edge over the banks. NBFCs can raise funds through market borrowings, that is, commercial papers to lower the cost of the fund.
On gold loans
The RBI’s recent regulations have hit the top as well as bottomline of the NBFCs. In India, gold buying is a regular process, and the attraction to the yellow metal is expected to continue..
The regulations may negatively affect the gold loan business in the short term for NBFCs but, in the long term, the overall gold loan market is set to grow as long as the demand for gold is growing in the country.
Hindu / Mar 1, 2013