RBI's Gold Loan Directive: Navigating Transition and Growth Challenges

The Reserve Bank's new notification urges financiers to re-evaluate gold loan practices, possibly impacting loan growth and increasing asset quality stress. Crisil notes this transition could slow gold loan disbursements, as lenders address flagged deficiencies. Despite potential delinquencies, Indian emotional value for gold may limit credit losses.

The Reserve Bank of India (RBI) has issued a new notification, prompting financiers to re-examine their gold loan practices, a move that may affect short-term loan growth and elevate asset quality stress, according to a domestic rating agency's forecast on Tuesday.

Crisil, a leading rating agency, expressed concerns about a potential slowdown in gold loan disbursements during the transition phase, as lenders adapt to stricter guidelines. The RBI had recently highlighted irregularities in gold loan practices and demanded a comprehensive review from lenders to identify and correct deficiencies promptly.

Areas of concern include lapses in monitoring the loan-to-value ratio, asset classification for overdue loans, and inadequate due diligence in verifying the end-use of gold loans. While reported loan delinquencies might rise as companies revisit NPA recognition norms, overall credit costs are expected to remain under control due to India's cultural attachment to gold and lenders' ability to maintain conservative loan-to-value ratios and conduct timely auctions.

(With inputs from agencies.)