RBI's red flag on non-bank lenders raises volatility, Fitch says

The rating agency noted that the advisories being put out by the RBI concerning non-bank financial institutions (NBFIs) in the recent past have highlighted the compliance gaps in the sector.

The RBI recently clarified that NBFIs should comply with existing regulatory caps on disbursal of loans in cash to below Rs 20,000 (around USD 240). This compares to a higher Rs 200,000 cap on general cash transactions for individuals, which some lenders, the rating agency said, had adopted as a limit.

The RBI notice meanwhile confirmed that rules on cash loan disbursements superceded the prescribed limit.Gold loan in India is frequently conducted in cash, as it is a source of credit for many rural and semi-urban borrowers, Fitch said.

Average loan sizes for Fitch's rated gold loan providers range in between Rs 50,000 to Rs 80,000, of which a meaningful share, it asserted, would have been in cash before the advisory was put out.

"We expect affected lenders to pivot towards disbursing via bank accounts. The share of gold-loan disbursements to bank accounts had been rising prior to the notice, and we believe a meaningful proportion of customers transacting in cash have access to bank accounts," said the rating agency.

The rating agency noted that the advisories being put out by the RBI concerning non-bank financial institutions (NBFIs) in the recent past have highlighted the compliance gaps in the sector.

The RBI recently clarified that NBFIs should comply with existing regulatory caps on disbursal of loans in cash to below Rs 20,000 (around USD 240). This compares to a higher Rs 200,000 cap on general cash transactions for individuals, which some lenders, the rating agency said, had adopted as a limit.

The RBI notice meanwhile confirmed that rules on cash loan disbursements superceded the prescribed limit.Gold loan in India is frequently conducted in cash, as it is a source of credit for many rural and semi-urban borrowers, Fitch said.

Average loan sizes for Fitch's rated gold loan providers range in between Rs 50,000 to Rs 80,000, of which a meaningful share, it asserted, would have been in cash before the advisory was put out.

"We expect affected lenders to pivot towards disbursing via bank accounts. The share of gold-loan disbursements to bank accounts had been rising prior to the notice, and we believe a meaningful proportion of customers transacting in cash have access to bank accounts," said the rating agency.

Fitch, citing government data, said bank account penetration in semi-urban and rural areas have increased by about 65 per cent between May 2019 and May 2024, now reaching around 347 million people.

"Nonetheless, new lending may slow as lenders transition more borrowers to bank-based disbursement. Some borrowers who still prefer cash-based channels may turn to alternatives, such as the informal sector," Fitch suggested.

Assuming a reasonable share of cash borrowers shift towards banking transactions, Fitch expects credit profiles for gold loan majors like Muthoot Finance Ltd and Manappuram Finance Limited to remain resilient to recent developments, though the notice has created "new risks".

In March, RBI halted IIFL Finance Ltd. (the company) to stop sanctioning or disbursing gold loans or assigning, securitising, or selling any of its gold loans. 

The company was, however, free to continue to service its existing gold loan portfolio through usual collection and recovery processesExplaining the rationale behind this move, RBI had then said certain "material supervisory concerns" were observed in the gold loan portfolio of the company, including serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default; breaches in Loan-to-Value ratio; significant disbursal and collection of loan amount in cash far in excess of the statutory limit; non-adherence to the standard auction process; and lack of transparency in charges being levied to customer accounts, etc.Fitch asserted that cash disbursal of gold-backed loans exceeding Rs 20,000 was one of a number of deficiencies regulators found in its business, some of which the rating agency considers to be more severe.

"Nonetheless, new lending may slow as lenders transition more borrowers to bank-based disbursement. Some borrowers who still prefer cash-based channels may turn to alternatives, such as the informal sector," Fitch suggested.

Assuming a reasonable share of cash borrowers shift towards banking transactions, Fitch expects credit profiles for gold loan majors like Muthoot Finance Ltd and Manappuram Finance Limited to remain resilient to recent developments, though the notice has created "new risks".

In March, RBI halted IIFL Finance Ltd. (the company) to stop sanctioning or disbursing gold loans or assigning, securitising, or selling any of its gold loans. 

The company was, however, free to continue to service its existing gold loan portfolio through usual collection and recovery processesExplaining the rationale behind this move, RBI had then said certain "material supervisory concerns" were observed in the gold loan portfolio of the company, including serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default; breaches in Loan-to-Value ratio; significant disbursal and collection of loan amount in cash far in excess of the statutory limit; non-adherence to the standard auction process; and lack of transparency in charges being levied to customer accounts, etc.

Fitch asserted that cash disbursal of gold-backed loans exceeding Rs 20,000 was one of a number of deficiencies regulators found in its business, some of which the rating agency considers to be more severe.