Copyright infringement not intended

Picture Courtesy:  INDIANEXPRESS 

Context:

RBI’s new draft rules for gold loans aim to tighten regulations while exempting small borrowers to protect vulnerable borrowers.

News is Detail

The RBI released draft guidelines to regulate gold loans, aiming to standardize practices across banks, non-banking financial companies (NBFCs), cooperative banks, and regional rural banks (RRBs).  

It aims to address growing concerns over rising non-performing assets (NPAs) and standardize lending practices across the sector. With gold loan outstanding reaching ₹11,11,398 crores by December 2024 (27.26% increase from previous year), these regulations aim to protect both lenders and borrowers while maintaining financial stability.

Highlights of the Draft Rules for Gold Loans

Eligible Collateral => A person can only pledge gold jewelry, ornaments, or bank-issued gold coins (22-carat or higher) for loans. Gold bars, ingots, or bullion (called "primary gold") are not allowed.

• Silver jewelry, ornaments, or bank-issued silver coins can also be used as collateral.
• The total weight of pledged gold cannot exceed 1 kg per borrower, with a cap of 50 grams for gold coins. For silver coins, the limit is 500 grams.

Loan-to-Value (LTV) Ratio => The RBI caps the LTV ratio at 75% for consumption loans (e.g., for medical bills or household expenses). This means if the gold is worth Rs 1 lakh, a person can borrow up to Rs 75,000.

• Lenders must calculate LTV based on the total repayable amount (principal + interest) at maturity, not just the initial loan amount, and maintain this ratio throughout the loan term.
• For income-generating loans (e.g., for business or farming), banks can set their own LTV policies but must assess the borrower’s cash flows rigorously.

Gold Valuation => Lenders must use a standardized process to assess gold purity, conducted by qualified assayers with no negative records. The borrower must be present during this assaying.

• Gold is valued based on 22-carat purity, using the lower of the 30-day average closing price or the previous day’s closing price of 22-carat gold, as quoted by the India Bullion and Jewellers Association or SEBI-regulated exchanges. If the gold is less than 22 carats, its value is adjusted proportionally.
• Silver is valued at 999 purity prices.

Proof of Ownership => Person must prove ownership of the pledged gold. If a borrower doesn't have a purchase receipt, they need to submit a declaration explaining how they acquired it.   

Loan Purpose and Monitoring => Consumption loans (for personal needs) and income-generating loans (for business or farming) are treated differently. Lenders must monitor how income-generating loans are used, and for consumption loans above a lender-set threshold, they may also track fund usage.

• Bullet repayment loans (where you pay principal and interest at the end) for consumption are capped at 12 months.
• Person cannot use the same gold to take both consumption and income-generating loans simultaneously.

Loan Repayment and Collateral Return => If borrower repay the loan fully, lenders must return their gold within 7 working days. If they delay, they pay Rs 5,000 per day as compensation.

• If default, lenders must give at least one month’s notice before auctioning gold. Auctions must be publicly advertised in two newspapers, with a reserve price not below 90% of the current market value. Any surplus from the auction must be returned to you within 7 days.

Documentation and Transparency => Loan agreements must detail the gold’s description, value, auction procedures, notice periods, and all charges. Lenders must communicate in preferred language or the regional language and explain terms if the borrower can’t read the agreement.

Other Restrictions:

• Cooperative banks and RRBs can offer bullet repayment loans up to Rs 5 lakh per borrower.
• Lenders must store gold in certified vaults and cannot outsource storage to third parties without strict controls.
• If the LTV ratio exceeds 75% for over 30 days, lenders face higher provisioning norms (1% additional on the outstanding amount), increasing their financial discipline.

Must Read Articles: 

Laws Govern Gold Import Into India 

Source: 

INDIANEXPRESS