What changed
RBI introduced a 60% LTV cap on gold jewellery loans for all NBFCs, effective immediately. NBFCs must now disclose the percentage of gold jewellery loans to total assets in their balance sheets. Additionally, NBFCs where gold jewellery loans constitute 50% or more of financial assets must achieve a minimum Tier 1 capital of 12% by April 1, 2014. Lending against bullion, primary gold, or gold coins is completely banned.
What it means for you
This is a prudential measure to curb concentration risk and protect against gold price volatility. NBFCs heavily reliant on gold jewellery lending face tighter capital requirements, which may slow their balance sheet growth and increase funding costs.
What you must do
- Review and adjust gold loan LTV policies to ensure compliance with the 60% cap immediately.
- Update balance sheet reporting to include the percentage of gold loans to total assets.
- For NBFCs with over 50% gold loan assets, plan capital infusion to meet 12% Tier 1 capital by April 1, 2014.
- Cease all advances against bullion, primary gold, and gold coins.
- Monitor gold price movements and adjust risk management frameworks accordingly.
Who it affects
All NBFCs lending against gold jewellery, NBFCs primarily engaged in gold jewellery lending (gold jewellery loans ≥ 50% of financial assets), Banks and other lenders providing funding to gold-loan NBFCs
Does the 60% LTV cap apply to all gold jewellery loans or only new ones?
The circular states the LTV ratio shall not exceed 60% for loans granted against gold jewellery, effective immediately. It does not specify whether it applies to existing loans, but as a prudential norm, it is likely applicable to all such loans.
What happens if an NBFC fails to meet the 12% Tier 1 capital requirement by April 1, 2014?
The circular mandates compliance by that date but does not specify consequences for non-compliance.
Are banks also subject to these gold loan LTV norms?
No, this circular specifically applies to NBFCs. Banks have separate regulatory guidelines for gold loans.