We interacted with the Reserve Bank of India’s Department of Non-Banking Supervision to get the regulator’s perspective on: (i) operations of gold loan NBFCs (GLCs); (ii) relative importance of NBFCs within the financial system; and (iii) increased bank credit flowing to smaller NBFCs. With respect to GLCs, we are given to believe that besides growth, lax processes, weak internal controls, and increased customer complaints did not go well with the regulator. However, the regulator did not seem to be too uncomfortable with higher yields and cash involvement in gold loan disbursements. The committee report related to gold loan NBFCs under the guidance of Mr. K.U.B Rao is expected soon. For the regulator, increased bank funding to NBFCs is still not a cause of concern, though rising real estate exposure of NBFCs is creating some nervousness. RBI believes NBFCs continue to be systemically important in the Indian financial system due to their reach, customer relationships, etc; however, their supervision and norms need to be tightened a tad.
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GLCs: Lax processes with rapid growth led to regulatory action
· We understand that lax systems and processes, weak internal controls related to collateral insurance, custody of gold, risk management etc. vis-à-vis growth in the loan book and physical expansion of GLCs made RBI uneasy. It also witnessed sharp rise in customer complaints against GLCs. This led to the regulator devising tough regulatory strictures related to increased KYC norms, forms in vernacular languages, disallowing GLCs from participating in their own auctions along with LTV cap, removal of PSL benefit tag, to lend robustness to the business model.
· As far as the business model is concerned, RBI is in favour gold loans as it provides easy liquidity to middle and lower income classes against gold which is a widely held asset. Also, in a country like India variety of products is a necessity.
· RBI is cognizant of the fact that growth has slowed and players have moderated branch expansion plans, but it will still be watchful of the system /process followed. Since processes/systems vis-à-vis growth is a concern area, we believe actions pertaining toK.U.B Rao Committee report, which is expected soon, will likely be an exhaustive set of guidelines with emphasis on operational processes.
· With respect to involvement of cash transaction in gold financing, the regulator indicated that majority customers depending on gold financing do not necessarily have a bank account and measures related to cap on cash transactions will increase operational difficulties for customers.
· RBI indicated its nervousness over GLCs now including making charges to arrive at collateral value for calculating LTVs.
· Amidst all this, RBI seems to be comfortable with banks offering higher LTVs on gold loans vis-à-vis NBFCs as the former’s processes and systems are superior to that of NBFCs.
Regards,
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