After several non-banking finance organizations were discovered to be in violation of regulatory requirements, the Reserve Bank of India directed them to conform with loan-to-value ratio, auction process, and cash disbursement norms.
According to reports, the regulator investigated non-banking finance companies' gold lending businesses after one of them, IIFL Finance, was subjected to regulatory restrictions for breaking rules.
The business of gold finance firms has grown phenomenally since the Covid-19 outbreak, rising from Rs 34,678 crore in March 2020 to Rs 1.31 trillion in March 2023, according to Reserve Bank of India data.
Last week, the regulator instructed gold loan non-banking financial companies not to distribute more than Rs 20,000 in cash, citing restrictions of the Information Technology Act. One of the issues was that the cash disbursement exceeded the norms.
According to sources, numerous gold finance organizations violated the cash disbursement component by extending 40-50% of the loan amount in cash. The typical ticket size for gold loans is about Rs 50,000 for most businesses.
"There were previous infractions, possibly by a little margin, for which the regulator was fine because they were inside the acceptable limit. However, a source stated that they are now prioritizing rigorous adherence to the guidelines.
In March, the Reserve Bank of India stopped IIFL Finance, a non-banking financial institution, from issuing and disbursing new gold loans due to "material supervisory concerns" and to protect consumers' interests.
Similarly, the loan-to-value cap for non-banking finance organizations is set at 75%. The regulator has instructed these enterprises to carefully adhere to the cap. Shaktikanta Das, governor of the Reserve Bank of India, stated that the regulator asks entities to take corrective action whenever there are violations.
"I'd like to point out that our supervisory apparatus at the Reserve Bank of India regularly supervises banks, non-banking financing businesses, and lenders. When asked about recent restrictions on non-banking finance companies during the April monetary policy press conference, Reserve Bank of India governor Shaktikanta Das stated, "Wherever we see major deviations in some compliance and regulatory requirements, our first intent is to deal directly, bilaterally with them, sensitize them, work with them, and impress upon them to take corrective action."
"When progress is not meeting expectations when working with them, we impose supervisory constraints; nonetheless, as part of the oversight, we regularly monitor the system and review the primary participants. As a result, I do not believe this is a system-wide issue because we have supervised every unit. "We take action in outlier cases," Das said.
The regulator has also warned non-banking finance providers to adopt a transparent approach when auctioning gold owing to non-payment.
According to sources, the Reserve Bank of India mandates that the individual whose gold is auctioned be aware that the procedure is being launched. Furthermore, the auction should take place at the 'Taluka' level, allowing the participant to be physically present throughout.
