The Reserve Bank of India (RBI) has introduced new regulations that are set to transform the gold loan sector in India. According to a report by S&P Global Ratings, these changes will require lenders to adapt their business models to remain competitive. The report, released on Thursday, highlights the potential for lenders to gain a competitive edge by aligning with the new regulatory framework. The RBI's directives provide lenders with greater flexibility in offering shorter-term loans for gold-backed consumption purposes, benefiting smaller borrowers by allowing them to unlock more value from their pledged gold assets.
Operational agility and service excellence are emphasised as crucial differentiators for lenders in this new environment. Lenders have until April 1, 2026, to fully implement these changes. One of the most significant aspects of the new rules is the inclusion of interest payments until maturity in the calculation of loan-to-value (LTV) ratios. This adjustment could potentially limit the upfront loan amount disbursed, a challenge that lenders will need to address as it conflicts with typical borrower preferences.
Additionally, the new regulations require credit appraisals to be based on borrowers' cash flow analysis for consumption-focused loans exceeding $3,000 and all income-generating loans. This shift in focus underscores the importance of adapting to the new regulatory environment to remain competitive. The adjustment to credit appraisals will be particularly significant for Non-Bank Financial Companies (NBFCs) with a strong focus on gold-based loan books, such as Muthoot Finance Ltd. and Manappuram Finance Ltd.
Adapting to New Regulatory Challenges
NBFCs will need to develop robust risk management policies and processes to evaluate borrowers' repayment capabilities based on cash flows, a departure from their traditional reliance on collateral valuation. Bridging the skill gaps to hire and train loan officers in assessing repayment ability will present both an upfront cost and a challenge for these lenders. S&P Global Ratings credit analyst Geeta Chugh noted, "NBFCs need to develop risk management policies and processes to evaluate borrowers' repayment capabilities based on income and cash flows."
The report anticipates that lenders will gradually increase the proportion of shorter tenor products with three-month and six-month maturities. This shift is expected to 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 RBI's latest rules provide clarity on the renewal of loans, supporting this shorter tenor model. The rule now mandates that renewal is only subject to full repayment of the interest, addressing past regulatory challenges faced by NBFCs like Manappuram Finance.
Furthermore, the report foresees increased traction in income-generating loans. As LTV norms become less restrictive, some lenders may expand these loans in their portfolios. Income-generating loans typically follow regular interest servicing structures, offering a stable revenue stream for lenders. Despite the potential for new business models, the report emphasizes that the real differentiator will remain the ability to disburse loans quickly and seamlessly.
