RBI’s New Gold Loan Rules To Raise Costs, Push NBFCs Toward Cash Flow-Based Lending: S&P
The new norms require lenders to shift to cash flow-based credit assessments and enforce tighter monitoring of loan-to-value (LTV) ratios. Operational agility and service excellence are emphasised as crucial differentiators for lenders in this new environment.
Mumbai: The Reserve Bank of India’s (RBI) new rules on gold loans issued this month will compel lenders in the booming gold loan market to overhaul their underwriting practices and prepare for higher near-term costs, S&P Global Ratings said on Thursday.
The new norms require lenders to shift to cash flow-based credit assessments and enforce tighter monitoring of loan-to-value (LTV) ratios. Operational agility and service excellence are emphasised as crucial differentiators for lenders in this new environment. Lenders have until April 1, 2026, to fully implement these changes.
One of the most significant aspects of the new rules is the inclusion of interest payments until maturity in the calculation of LTV ratios. This adjustment could potentially limit the upfront loan amount disbursed, posing a challenge for lenders as it conflicts with typical borrower preferences.
The new regulations also require credit appraisals to be based on borrowers' cash flow analysis for consumption-focused loans exceeding $3,000 and for all income-generating loans. This shift underscores the importance of adapting to the new regulatory environment to remain competitive.
The rating agency said that the adjustment to credit appraisals will be particularly significant for Non-Banking Financial Companies (NBFCs) with a strong focus on gold-based loan books, such as Muthoot Finance Ltd and Manappuram Finance Ltd.
NBFCs will need to develop robust risk management policies and processes to evaluate borrowers' repayment capabilities based on cash flows. Traditionally, they have relied on collateral valuation. Bridging the skill gaps to hire and train loan officers in assessing repayment ability is both an upfront cost and a challenge to overcome, S&P Global Ratings credit analyst Geeta Chugh noted.
The report anticipates that lenders will gradually increase the proportion of shorter-tenure products with three-month and six-month maturities. This shift is expected to benefit low- to middle-income borrowers by enabling them to receive larger upfront loan disbursements against their pledged collateral, given the new LTV settings.