Fitch Ratings has said that the Reserve Bank of India’s draft rules for gold-backed loans will require non-bank financial companies to alter their operational practices, particularly around underwriting and risk management. While the RBI's proposals offer greater regulatory clarity, they are likely to increase compliance costs and change the lending model that gold loan NBFCs have long relied on.

Gold-focused lenders such as Muthoot Finance and Manappuram Finance, both rated by Fitch, are expected to manage the changes, though the operational burden may be significant. The requirement to assess borrower repayment capacity and conduct business cash flow evaluations for income-generating loans marks a shift from the collateral-based approach that has defined gold loans. These measures may slow loan processing times and increase costs, especially when dealing with rural and semi-urban borrowers who often have irregular income patterns.

The proposed rule that loan-to-value ratios—capped at 75%—must be maintained throughout the tenor of the loan, and must include interest in the case of bullet repayment, adds another layer of complexity. This will likely reduce effective loan amounts and could impact borrower demand. NBFCs may have to alter product structures, possibly favouring shorter tenors or amortising repayments.

A new 1% provisioning requirement for loans breaching the loan-to-value cap adds a buffer against gold price volatility but may also affect margins during price corrections. Fitch views this as manageable but notes that overall profitability will become more sensitive to changes in gold value.

The draft rules also include provisions for customer notification, reimbursement procedures, and broader disclosures, aiming to consolidate earlier guidelines and improve transparency. While operational challenges are likely, Fitch expects large NBFCs to adapt without material disruption to business continuity.