India’s central bank on Wednesday warned some non-bank lenders against extending cash loans beyond the permitted limit of 20,000 rupees ($240), according to two sources and a letter seen by Reuters, a move that is expected to put a strain on end to large cash payments to people borrowing against gold.
The central bank’s notice comes weeks after regulatory action was taken against IIFL Finance, India’s second-largest player in the gold lending sector, for violating norms in disbursement of money and other standards.
Retail lending in India has seen rapid growth, with gold lending increasing three-fold in the last four years.
According to at least a dozen sources, a significant portion of gold loans are disbursed in cash.
None of these sources wanted to be identified because they are not authorized to speak to the media.
India prohibits lenders from giving customers cash loans above 20,000 rupees, according to income tax rules.
Non-banking financial companies (NBFCs) flouted this rule and gave large cash loans by asking customers to sign an “indemnity” to accept liability in case of income tax lawsuits, they said. sources told Reuters.
The Reserve Bank of India (RBI) has therefore increased its vigilance towards lenders who do not comply with the rules in order to protect the interests of customers and avoid the emergence of systemic risk, said one sources.
On Wednesday, the RBI letter reiterated the law.
“Please refer to the provisions of Section 269SS of the Income Tax Act, 1961, which states that no individual shall receive more than Rs 20,000 in cash as loan amount,” said the central bank.
“Therefore, no NBFC shall disburse a loan amount exceeding Rs 20,000 in cash.
The central bank did not immediately respond to an email seeking comment.
Non-bank lenders that provide loans against gold “have faced intense competition from smaller players”, which has pushed them to take “excessive risks by exceeding the cash disbursement limit ” said a Source familiar with the central bank’s thinking.
Shares of gold loan finance companies Muthoot Finance and Manappuram Finance fell 2.4% and 4.3% respectively after Reuters reported the notice.
The RBI is likely to want to limit the creation of ‘black money’ in the system and plug any loopholes related to existing income tax rules, which some NBFCs may be violating,” said Amit Khurana, head of equities at Dolat Capital.
($1 = 83.5055 Indian rupees) (article written by Siddhi Nayak, supplemented by Jaspreet Kalra; editing by Swati Bhat and Mrigank Dhaniwala)
