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Context

• Earlier this month, the Reserve Bank of India (RBI) urged gold loan lenders to follow regulatory norms.
• This is meant to tighten control over Non-Banking Financial Companies (NBFCs).
• This move comes after the RBI discovered some NBFCs were not complying with these norms.
• In March, the RBI banned IIFL Finance from issuing new gold loans due to violations of lending regulations.

All about NBFCs: https://www.iasgyan.in/blogs/nbfcs-and-its-types

What are the RBI’s gold loan norms?

The Reserve Bank of India (RBI) has set specific guidelines for gold loans:

• Loan Amount Limit: Lenders can only offer up to 75% of the gold's value as a loan to ensure there is enough collateral to cover potential losses if the borrower defaults.

Note: It should be noted that the RBI had temporarily allowed lenders to make loans up to 90% of the value of the underlying gold collateral during the pandemic to help borrowers, and this also helped NBFCs expand their loan books aggressively. However, this higher limit expired in March 2021.

• Disbursement Restrictions: To comply with income tax rules, lenders can disburse no more than ₹20,000 in cash. The rest of the loan amount must be deposited into the borrower's bank account.
• Auction Process: If a borrower defaults, the gold must be auctioned in a fair and transparent manner, and the auction should be held in locations accessible to borrowers.

The RBI is also working on more detailed guidelines for gold loans to ensure stricter compliance.

Why does the RBI want to reinforce these norms now?

• The RBI found that some Non-Banking Financial Companies (NBFCs) are violating gold loan regulations.
• In March, IIFL Finance was disciplined for issues including:
• Loan amounts exceeding 75% of the gold's value.
• Inaccurate gold evaluation.
• Improper loan disbursal practices.
• Irregularities in the auction process.
• NBFCs may aggressively expand their loan portfolios by overestimating the value of gold collateral.
• Unlike banks, which use external assayers, NBFCs often use internal assayers, leading to potential overvaluation.
• Since the pandemic, NBFCs' gold loan portfolios have grown rapidly, from ₹35,000 crore in 2020 to ₹1,31,000 crore in 2023.
• The RBI fears that such aggressive lending and widespread norm violations could cause future systemic issues as the gold loan industry continues to grow.

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