How does RBI’s cash disbursal limit affect gold loan customers and businesses?

The recent advisory issued by the Reserve Bank of India (RBI) imposing a cash disbursal limit of ₹20,000 for gold loan customers has stirred discussions across the financial sector. This directive aims to regulate cash transactions in the gold loan segment and address concerns related to transparency and accountability. This article reviews the implications of the RBI's advisory on both customers availing gold loans and businesses operating in the gold financing landscape.

RBI's advisory and clarity

The RBI's advisory brings much-needed clarity to the cash disbursement process in the gold loan segment. By setting a specific limit of ₹20,000, the regulator aims to streamline transactions and mitigate risks associated with cash-based lending practices. This move is expected to foster greater transparency and compliance within the industry.

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Impact on customers

For customers availing gold loans, the shift towards non-cash disbursements may present certain challenges initially. Traditionally, cash disbursements have been a preferred option for many borrowers due to their convenience and immediacy. However, with the RBI's directive, customers will need to adapt to receiving funds through bank accounts, electronic transfers, or cheque payments. 

While this transition may require adjustments for some customers, it ultimately promotes a more secure and traceable lending process. India’s strides in recent years on electronic transfers such as UPI make this easy, yet there is some distance to go to eliminate cash transactions of large values, and this directive is a step in the direction.

Impact on businesses

Gold financing companies, including prominent incumbents, banks as well as the new NBFCs, are well-equipped to comply with the RBI's advisory. These organisations have robust processes, policies, and technologies in place to facilitate non-cash disbursements efficiently. As a result, the playing field in the gold financing sector is expected to level, ensuring fair competition among lenders.

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Short-term challenges and resilience

In the short to medium term, there may be some customer resistance towards non-cash disbursements, particularly among those accustomed to cash transactions. This shift in customer behaviour could potentially impact the market share of organised lenders in the gold financing landscape, which currently stands at approximately 35%. Additionally, customers who previously preferred gold financing NBFCs for their cash disbursement nature may consider shifting to banks for their lending needs.

Adapting to the new normal

While the transition to non-cash disbursements may pose challenges in the short term, it is expected to become the new normal for customers in the gold financing segment. Similar transitions have been witnessed in other financial sectors, such as microfinance, where non-cash transactions have become prevalent over time. As customers acclimatise to the change, gold financing NBFCs and banks alike will need to innovate and adapt to meet evolving customer preferences and regulatory requirements.

The RBI's advisory on cash disbursal limits for gold loan customers marks a significant step towards enhancing transparency and accountability in the gold financing sector. While the transition to non-cash disbursements may present challenges initially, it ultimately promotes a more secure and efficient lending environment. As customers and businesses adapt to the new normal, the gold financing landscape is poised for continued growth and innovation in line with regulatory expectations.

Sumit Sharma, Founder of Radian Finserv