The Reserve Bank of India has set a deadline of six months for banks to reduce exposure to 7.5% of their capital funds from 10% in non-banking finance companies or NBFCs which have half of their total financial assets in gold loans.
The banking regulator warned about concentration risk inherent in NBFC's business model when more than 50% of their lending is against gold jewellery. These NBFCs rely heavily on bank finances to expand their business.
NBFCs which are predominantly engaged in lending against collateral of gold jewellery have recorded significant growth in recent years, both in terms of their balance sheet size and physical presence.
In view of regulatory concerns arising out of the rapid pace of business growth and concentration risk inherent in their business model, RBI has prescribed certain prudential measures like limiting loan to value ratio, increasing the minimum tier I capital requirement and, prohibiting loans against bullion/primary gold.