RBI instructed Commercial Banks to Reduce their Exposure to Gold Loan Companies to 7.5%

Reserve Bank of India (RBI) on 17 April 2012 instructed commercial banks to reduce their exposure to gold loan companies to 7.5% of their capital funds from the existing 10%. The directive will impact the gold loan companies such as Muthoot Finance and Manappuram Finance as they will receive less funding. The central bank also set up a working group to suggest ways to deal with the issue.

Banks were directed to reduce their regulatory exposure ceiling in a single NBCFC, having gold loans to the extent of 50% or more of its total financial assets, from the existing 10%  to 7.5% of bank's capital funds. The direction was given in the back of a situation when gold loans were growing rapidly and there was a concentration risk.

The direction came a month after the RBI directed the Non-banking Finance Companies (NBFCs) not to sanction loans exceeding 60% of the value of the jewellery, against the industry practice of giving loans to upto 80%-90% of the jewellery value.

Industry analysts are of the opinion that RBI’s directions in this respect will help to moderate the growth of the NBFCs in the space. However, Muthoot, the country’s biggest player in gold loan stated that there would not be much impact.