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RBI Instructs NBFCs to Comply with Norms in Gold Finance Sector


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The Reserve Bank of India (RBI) has directed non-banking financial companies (NBFCs) to adhere strictly to regulations pertaining to loan-to-value ratio, auction procedures, and cash disbursement. This action comes after the discovery that certain NBFCs have violated regulatory guidelines. The RBI examined the gold loan business of NBFCs following regulatory restrictions imposed on IIFL Finance for non-compliance.

Significant Growth in the Gold Finance Industry

According to RBI data, the gold finance sector has experienced remarkable growth since the onset of the pandemic. The sector’s business has surged from Rs 34,678 crore in March 2020 to Rs 1.31 trillion in March 2023. Moody’s predicts that India’s GDP growth of 6.6% in FY25 will further fuel the growth of NBFCs.

Cash Disbursement Concerns and Regulatory Instructions

In a recent communication to gold loan NBFCs, the RBI instructed them not to disburse more than Rs 20,000 in cash, citing provisions of the Income-Tax Act. One of the concerns raised was related to cash disbursements exceeding the prescribed limits. Sources revealed that many gold finance companies have violated the cash disbursement component by providing 40-50% of the loan amount in cash. The average ticket size of gold loans for most companies is around Rs 50,000. The RBI is now emphasizing strict adherence to the prescribed norms and is no longer tolerating breaches, even minor ones.

Regulatory Actions and Loan-to-Value Cap

In March, the RBI prohibited IIFL Finance, an NBFC, from sanctioning and disbursing new gold loans due to “material supervisory concerns” and to safeguard the interests of customers. Additionally, the RBI has instructed NBFCs to strictly adhere to the loan-to-value cap of 75%. The regulator has stated that it takes corrective measures whenever violations are detected.

Transparent Auction Process for Non-Payment

The RBI has also sensitized NBFCs about the need to follow a transparent process when auctioning gold due to non-payment. It is important that the individual whose gold is being auctioned is aware of the initiation of the auction process. Furthermore, the auction should be conducted at the taluka level to allow the person to physically participate. Overall, the RBI is ensuring that NBFCs comply with regulations and is taking appropriate actions in cases of non-compliance to safeguard the interests of customers and maintain transparency in the gold finance sector.

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