Gold Loan Draft Directions of RBI
Reserve Bank of India (RBI) released its ‘draft’ directions for lending against gold as collateral for comments by public. In this regard, I gave a few suggestions in my article in Business Line dated 09.12.2024 (please see box) emphasising that the regulator need to review the existing gold loan guidelines and practices followed by different regulated financial entities (REs). I am happy to share that some of the ‘draft’ directions of RBI, now released are in sync with my suggestions in the above article. (I do not claim that RBI read my article or that the suggestions were given due cognisance by the regulator, as it will be stretching my imagination a bit far).
RBI 'draft' directions that partly reflect my suggestions are
1. Whether the gold loan applications are sourced directly or through third parties like BCs (business correspondents), etc. the gold should be accepted in the branches of the lender only and apprising, valuation should also be done by the staff of the lender only.
2. Loan renewals including bullet repayment ones and top up loans on existing loans are permitted, provided the total exposure is within the loan to value ratio (LTV) of 75% and the accrued interest (applied or not) up to that date is paid.
3. Assaying and valuation of gold should be done in the presence of the borrower. An e-certificate about the gold pledged covering details of gold, gross and net weight, image of the gold etc. should be prepared in duplicate and a copy be given to the borrower against his/her acknowledgment.
4. End use of loans is to be ensured for gold loans extended for income generating purposes and in respect of consumption loans, if it exceeds the threshold limit fixed by the RE as per the lender's policy. (End use need not be insisted up to the threshold limit of a consumption loan)
5. The onus to comply with the directions in respect of loans (where gold is accepted as collateral) for income generating purposes lie with the lender. In case of any failure to comply with the directions by the lender, the loan will be treated as consumption loan. (i.e. it will be classified as personal loan and not under the respective business category)
6. Multiple loans to a single individual is not prohibited, but is subject to stricter internal audit and supervision.
In addition, the following are the other salient features:
A. There should be a ceiling on the loan portfolio secured by eligible gold collateral. It should not exceed a proportion of the total loans and advances of the lender as per the RE's policy
B. Single borrower limit be fixed for loans secured by gold collateral for consumption and income generating purposes.
C. Aggregate weight of gold/silver ornaments pledged shall not exceed 1 kilogram per borrower. In case of loans against coins, the aggregate weight shall not exceed 50 grams for gold and 500 grams for silver
D. Loan to value ratio (LTV) shall not exceed 75% at all times and the loan amount for this purpose is the current outstanding amount plus accrued and unrealised interest till date. In the case of bullet repayment loans, LTV should be calculated on the amount repayable at the maturity date and not on the original loan extended.
E. In respect of hallmarked gold ornament/coin offered as security, preferential treatment may be given in respect of margin and interest.
F. Loans for income generating purposes include farm credit, loans for business purposes and loans where productive assets are created.
G. No loans to be extended against re-pledged collateral.
H. No concurrent loans be given under consumption and income generating purposes for the same borrower.
I. Auction procedure should be transparent and the reserve price shall not be less than 90% of the current value of the gold collateral.
J. The lenders shall disclose in their notes to accounts, the amount and percentage of loans against eligible collateral, separately for both income generating as well as for consumption purposes.
Grey Areas:
a. Where the original receipts of the gold ornaments are not available to establish ownership, the lender is required to obtain a suitable document/declaration from the borrower, explaining how the ownership is determined. This is a grey area, as many gold ornaments pledged may not have original receipts and the lender might become accountable, in case the gold do not belong to the borrower during subsequent investigations by police authorities.
b. Classifying the loan for income generating purposes under different segments like Agriculture MSME etc. continue to rely on information obtained from the borrower. The regulator may make it simple by stipulating the documents and declaration to be obtained from the borrower at the time of sanction of the loan, without going through a lengthy process like preparation of cash flows, etc.
Summary: RBI draft directions answers almost all concerns governing the gold loans. A good beginning is made to make supervisory compliance of REs simpler and effective.
Regards
V. Viswanathan
CGM Retd e-SBT
18th April 2025
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