The Reserve Bank of India (RBI) has instructed non-banking financial companies (NBFCs) to strictly adhere to regulations concerning loan-to-value ratio, auction processes, and cash disbursement. This directive follows the discovery of regulatory violations by some NBFCs. Sources indicate that the RBI’s assessment of the gold loan sector was prompted by regulatory restrictions imposed on IIFL Finance for non-compliance with these norms.
According to RBI data, the gold finance companies’ business has experienced remarkable growth since the pandemic, soaring from Rs 34,678 crore in March 2020 to Rs 1.31 trillion in March 2023.
Last week, the RBI communicated to gold loan NBFCs, instructing them not to disburse more than Rs 20,000 in cash, in line with the provisions of the Income-Tax Act. Concerns were raised about disbursements exceeding these limits. Sources revealed that many gold finance companies violated this regulation, disbursing 40-50 percent of the loan amount in cash. For most companies, the average gold loan size is around Rs 50,000.
“There were breaches in the past, possibly by a small margin, which the regulator tolerated as they were within permissible limits. However, now there is a strong emphasis on strict adherence to the norms,” a source stated.
In March, the RBI barred IIFL Finance, an NBFC, from issuing new gold loans due to “material supervisory concerns” and to protect customers. The RBI has also reinforced the 75 percent loan-to-value cap for NBFCs, urging strict compliance.
RBI Governor Shaktikanta Das stated that the RBI regularly supervises banks and NBFCs, addressing major compliance deviations by engaging directly and urging corrective actions.
RBI Governor Shaktikanta Das stated, “When progress is insufficient, we impose supervisory restrictions. We regularly supervise and review major players, but this is not a system-wide problem as we oversee every entity and take action in outlier cases.”
The RBI has also emphasized the need for a transparent auction process for gold due to non-payment. Sources indicated that the RBI insists that individuals whose gold is being auctioned must be informed and that auctions should be conducted at the taluka level to allow the person to be present.