Budget 2020: NBFCs offering gold loans can meet part of unmet credit demand, boost growth; here's how

In the forthcoming Budget, finance minister Nirmala Sitharaman will be required to address several challenges, but the highest priority should go towards reviving growth. Keeping aside the debate of structural versus cyclical slow-down, the economy has slowed down sharply over the past few quarters, amid challenges in the banking and NBFC sectors, low demand and job losses. While the bigger players have not faced the brunt of the credit squeeze, the situation for the smaller players is dire. Banks are flush with money yet unwilling to take a risk and lend to smaller businesses, especially to MSMEs, traders, shopkeepers, etc., the strata most vulnerable to liquidity stress. While the big borrowers were able to approach the global markets, the smaller businesses have suffered. The recent surge in international borrowings by an increasing number of established players suggests that despite the vast liquidity infused into the economy by Reserve Bank of India (RBI), banks aren’t willing to loosen their purse strings yet. In times like these, when entrepreneurs are starving for credit from Banks, the finance minister should do everything possible to enable NBFCs to step up their lending to marginal borrowers. Here are a few suggestions that would facilitate NBFCs, especially gold loan lenders, to fulfil at least a part of the sizeable unmet credit demand and thus do their bit to revive economic growth: [caption id=“attachment_1265237” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] Gold loans are mainly used by people in rural or semi-urban areas, who borrow by pledging their used household jewellery as they don’t have access to any other forms of institutional credit. Gold loans are typically microloans of less than Rs 50,000 ticket size. In this context, the present regulatory dispensation is discriminatory towards NBFCs, as banks are given preferential treatment. Gold loans provided by NBFCs should get equal and fair treatment at par with the banks. Indeed, gold loan NBFC may even deserve a better deal than banks as these are the lenders who reach out and connect with the last mile customers. Gold loan NBFCs are often present in areas where banks are reluctant to enter. Given the above context, what are the steps to be taken to level the playing field? The first step would be to introduce a mechanism to replace the cap on loan to value (LTV) with risk-weighted capital requirements. At present, the gold loan companies can lend only up to 75 percent of the value of gold in the jewellery. Restricting the pledge value of gold jewellery is counterproductive to the mission of financial inclusion. Non-institutional lenders facing no such restriction have been given an opportunity to step in and attract marginal borrowers with the lure of higher LTV, albeit at exorbitant costs. An artificial cap on LTV tilts the playing field in favour of non-institutional lenders. It denies institutional lenders (bank and NBFCs) a legitimate opportunity to capitalise on their economies of scale, experience, capital adequacy and superior risk management practices. Besides, we need to move away from the present system of prescribing 100 percent risk weightage for all risks (without considering the differences in intrinsic risks) to a prudential risk management practice of risk-based capital requirement for NBFCs at par with the banks. The prescribed risk weights should take into account the inherent default risk and the post-default recovery value. Differentiated risk weightage would not only enable the well run, well-capitalised NBFCs to compete with banks, it would also ensure that NBFCs do not take undue risks. Secondly, while gold loans extended to agrarian borrowers by the banks enjoy the priority sector lending (PSL) status, no such benefit is available to NBFCs. An average gold loan customer borrows against household jewellery for short tenures of three months or so, by pledging less than 20 grams of gold as collateral. This customer may be a farmer, micro-entrepreneur or small shop owner looking to meet their seasonal requirements of working capital or any other pressing need, for which banks do not have a product. A large proportion of gold loans go to MSMEs for their short-term working capital requirements. A gold loan against household jewellery is one of the most common and prevalent sources of funds for MSMEs. With the government looking to increase the mobilisation of privately held gold and improve access to credit for MSMEs and micro-enterprises, it would be prudent to restore the PSL status to small gold loans, for instance under Rs 50,000). Thirdly, NBFCs should be given access to the same tools for recovery of dues as are available to banks who have recourse to the SARFAESI Act and Debt Recovery Tribunals (DRTs). Presently, NBFCs are allowed to enforce their security interest through SARFAESI only for cases involving a principal amount of one crore rupees or more, while this limit is just one lakh rupees for banks and other financial institutions. When the goal is to drive parity between banks and NBFCs based on the nature of the business, it is prudent and equitable that NBFCs are treated on par with banks regarding legal options for recovery of their dues. Conceding to NBFCs the same right of recovery under SARFAESI will help NBFCs improve their recoveries. It is time that gold loan NBFCs got its due share of support from the policymaking establishment. Somehow, contributions made by them towards financial inclusion, formalisation of credit and monetisation of household gold jewellery hasn’t received the mindshare it deserves. (The writer is MD & CEO of Manappuram Finance Ltd. Views are personal.) Follow full coverage of Union Budget 2020-21 here