Muthoot Fin, Manappuram will be able to adapt well to RBI's new gold loan guidelines: Fitch

The Reserve Bank of India’s (RBI) draft guidelines for gold-backed loans are expected to enhance regulatory clarity and streamline compliance across lenders, according to Fitch Ratings.

Fitch on Tuesday said that while the proposals could increase operational complexity, particularly for smaller players, large gold-loan specialists such as Muthoot Finance Ltd and Manappuram Finance Ltd are well-positioned to adjust to the changes.

Muthoot Finance and Manappuram shares were trading at Rs 2038.70 and Rs 225.80, up 1.06 per cent and almost flat respectively as of 1.50 PM on Tuesday.

In its note, Fitch said the RBI’s proposed regulatory enhancements would reduce uncertainty and variability in lender practices, ultimately strengthening oversight in the fast-growing gold loan segment. However, the changes are likely to introduce additional procedural burdens, especially for non-bank financial institutions (NBFIs) that dominate the space.

Last week, the apex bank revealed revised guidelines for lending of gold loans, while announcing the Monetary Policy decisions, where it cut repo rate by 25 bps. The key proposals include:

• Linking loan amounts to borrowers' repayment ability
  
  
• Clearer guidelines on how to calculate the loan-to-value (LTV) ratio
  
  
• Income checks for personal loans
  
  
• Cash flow checks for business loans backed by gold
  
  
• Ensuring the 75% LTV limit applies throughout the loan term, not just at the start
  
  

The rules could slow down loan approvals and raise costs for non-bank financial companies (NBFIs), especially in rural areas where incomes are harder to assess. Lenders may also have to tweak their gold loan products, like offering shorter repayment periods or EMI-based loans.

"We believe NBFIs are less likely to offer such loans, as the underwriting process may be too cumbersome. The draft rules do not specify whether NBFI loans to sole proprietors for working capital would be classified as income-generating loans, but if so, this could significantly slow an important source of credit to the rural economy," Fitch said.

For income-generating loans, the draft mandates a cash flow-based assessment, which Fitch believes may discourage many NBFIs from offering such products due to the complexities involved. It is also unclear whether loans to sole proprietors for working capital would fall under this category, a classification that could significantly affect credit access in rural areas.

A 1% provision will be required if loans breach LTV limits, which Fitch says is manageable but could impact profits if gold prices fall. "This acknowledges that it can be difficult to rectify LTV breaches through collateral calls or repayment notices when gold prices decline. The amount is also manageable relative to net interest margins, but the measure will make credit costs and profitability more sensitive to collateral price falls," the rating agency said.

The RBI also plans to improve customer protection and transparency by measures like timely notifications and reimbursement mechanisms. These changes follow earlier concerns about irregular practices in gold lending. Additionally, lenders will be required to offer broader disclosures around the performance of their gold-backed loan portfolios, which Fitch believes will improve overall market transparency.

These proposed changes follow the RBI’s observations in September 2024 about irregularities in gold loan practices, and aim to unify a fragmented set of older rules. However, the RBI has left intact existing restrictions that require its approval for NBFIs with over 1,000 branches to expand further.