The Reserve Bank of India (RBI) on Monday issued guidelines tightening the norms for lending against gold jewellery in the light of the spike in gold imports in the recent years and the potential threat this could pose to external stability of the country.
The working group led by KUB Rao made a number of recommendations. The stricter norms for NBFCs that are lending against the collateral of gold jewellery relate to putting in place an appropriate infrastructure, ensuring standardisation in arriving at a loan to value (LTV) ratio and ensuring a streamlined auction process.
Appropriate infrastructure for storage of gold ornaments
Some NBFCs are predominantly into lending where 50 per cent or more of financial assets lent against gold jewellery lack amenities for storage of gold ornaments taken as collateral.
Hence, to ensure that a minimum level of physical infrastructure and facilities is available in each of the branches engaged in financing against gold jewellery, NBFCs should review the arrangements in place at their branches and ensure that necessary infrastructure is put in place.
Prior approval of RBI for opening more than 1,000 branches
RBI said unbridled growth may not be in the interest of NBFCs or the sector and there is a need for consolidation of the existing network. Consequently, it is mandatory for NBFCs to obtain RBI’s prior approval to open more than 1,000 branches. Those that have more than 1,000 branches already may approach RBI for prior approval for further branch expansion.
Standardisation of value of gold in arriving at LTV ratio
Currently, there is no standard method for arriving at the value of gold accepted as collateral and valuation is arbitrary and opaque. To standardise the valuation and make it more transparent to the borrower, RBI has decided that gold jewellery accepted as collateral will have to be valued at the average of the closing price of 22 carat gold for the preceding 30 days as quoted by The Bombay Bullion Association Ltd (BBA). LTV ratio for loans against jewellery continues to be at 60%.
Verification of ownership of gold
If the gold jewellery pledged by a borrower at any one time or cumulatively on loan outstanding is more than 20 grams, NBFCs must keep a record of the verification of the ownership of the jewellery.
The auction should be conducted in the same town or taluka in which the branch that has extended the loan is located. While auctioning gold, the NBFC should declare a reserve price for the pledged ornaments.
NBFCs financing against the collateral of gold must insist on a copy of the PAN card of the borrower for all transactions above Rs 5 lakh. Loans for Rs 1 lakh or above must only be disbursed by cheques.
NBFCs shall not issue misleading advertisements such as claiming issuance of loans in two-three minutes.
(Edited by Joby Puthuparampil Johnson)