Short Loans, Long Gains? S&P Says Flexibility Will Be Key for Gold Lenders

S&P Global Ratings has indicated the need for larger credit appraisal adjustments for NBFCs having more than half their loan books gold-backed, including Muthoot Finance (MUTT.NS) and Manappuram Finance (MNFL.NS). The agency has cited a shift in regulatory norms and market dynamics as main drivers for the heightened scrutiny.

 

The Reserve Bank of India's new gold loan rules with stricter loan-to-value (LTV) ratios and the inclusion of interest accrued in LTV calculations will reduce the buffer for gold price volatility, S&P said. The NBFCs will be compelled to adopt sharper underwriting practices, more frequent auction triggers, and higher provisioning policies.

 

In addition, S&P noted that short-tenor gold loans will increasingly serve as a customer retention key, especially as borrowers seek to purchase greater flexibility and rapid disbursals in a shifting credit landscape. The short cycles can help NBFCs to manage risk more effectively while maintaining customer loyalty.

 

Despite the setback, S&P appreciated that the new norms offer growth opportunities, particularly for loans of less than ₹2.5 lakh, wherein LTVs are now permitted to go up to 85%, from the earlier 75%.

 

Sources: S&P Global Ratings, Business Standard, ET BFSI