On Wednesday, India’s central bank cautioned certain non-bank lenders against exceeding the permitted cash loan limit of 20,000 rupees ($240), according to information from two sources and a letter reviewed by Reuters. This move is expected to curb substantial cash disbursements to individuals borrowing against their gold holdings.
The advisory from the central bank comes shortly after regulatory action was taken against IIFL Finance, the second-largest player in India’s gold loan market, for breaching cash disbursement regulations and other norms. Over the past four years, retail credit in India has seen significant growth, with loans against gold surging threefold. Multiple sources, speaking anonymously, indicated that a considerable portion of these gold loans is being distributed in cash.
India prohibits lenders from issuing cash loans exceeding 20,000 rupees to customers, in accordance with income tax regulations. Despite this, non-bank finance companies (NBFCs) have reportedly been circumventing this rule by persuading customers to sign an ‘indemnity’ agreement, accepting liability against potential income-tax repercussions.
In response, the Reserve Bank of India (RBI) has heightened its scrutiny of non-compliant lenders to safeguard customer interests and prevent the accumulation of systemic risks. The RBI’s recent communication reinforces the legal framework, citing the provisions of Section 269SS of the Income Tax Act, 1961, which restricts individual cash loans to 20,000 rupees.
Non-bank lenders providing gold-backed loans have been facing fierce competition from smaller players, leading them to take excessive risks, such as surpassing cash disbursement limits, according to a source familiar with the central bank’s perspective. Following Reuters’ report on the advisory, shares of gold-loan financiers Muthoot Finance and Manappuram Finance experienced declines of up to 2.4% and 4.3%, respectively.
Amit Khurana, head of equities at Dolat Capital, suggested that the RBI’s intent may be to curb the generation of ‘black money’ in the financial system and close any loopholes related to existing income tax regulations, which some NBFCs may have been exploiting.
