RBI Issues Harmonised Draft Guidelines On Gold Loan Lenders

Irrespective of the purpose for which the loan has been sanctioned, an LTV cap of 75% will apply to all gold loans sanctioned by non-banking financial companies.

The RBI has found that select supervised entities carry several irregular practices in granting of loans against pledge of gold ornaments and jewellery. (Reserve Bank of India headquarters in Mumbai. Source: Vijay Sartape/NDTV Profit)

The Reserve Bank of India has issued comprehensive draft guidelines on gold loans, which state that all loans classified against gold will have a loan-to-value ratio of not more than 75% of the value of gold, the central bank said in a press release.

RBI has laid down certain changes that lenders must prescribe as part of their policy.

Irrespective of the purpose for which the loan has been sanctioned, an LTV cap of 75% will apply to all gold loans sanctioned by non-banking financial companies.

For bullet repayment loans, the LTV ratio should be computed by treating the total amount repayable by the borrower at maturity rather than the loan sanctioned at origination. The prescribed LTV ratio must be maintained on an ongoing basis throughout the tenor of the loan.

If there is an LTV ratio breach for over 30 consecutive days, the entire outstanding amount will attract an additional standard asset provisioning of 1%. The provisioning can revert to the normal levels only after the LTV ratio is brought within limits and remains so for at least 30 days.

Further, if the loan is in breach of the LTV ratio as of the date of maturity, no renewal will be allowed, the central bank said.

Another important change that the central bank aims to bring in is that the income-generating loan must be classified as per the purposes and not as gold loans.

The quantum and tenor of loan size will be based on the underlying income-generating activity and not on the basis of the value of the collateral.

Proper charge shall be created on security for such loans, wherever applicable, in addition to the pledge or charge on gold collateral.

Moreover, any concurrent classification of these loans as gold loans for disclosure purposes should not result in double counting of advances and must explicitly provide disclosure based on their purposes.

In case of non-compliance of income-generating loans, they will be treated as a consumption loan, the central bank said.

Further, lenders must ensure proper systems and controls for monitoring end use of loans and proper relevant evidence must be recorded.

Documentary evidence of end use will also be mandatory for all income-generating consumption loans.

Early Wednesday, Governor Sanjay Malhotra had said that the RBI will shortly release draft comprehensive guidelines on gold loans.

In order to harmonise guidelines on gold loans across entities to the extent possible, keeping in view their risk differential capabilities, the central bank will issue comprehensive regulations on prudential norms as well as conduct-related aspects for such loans, Malhotra had said.

This has come as the RBI on Sept. 30, 2024, had issued a circular, advising lenders to review their policies, processes and practices in granting loans against the pledge of gold ornaments.

In the circular, the regulator had said that in its recent supervisory checks, it had noted operational gaps at these lenders. These included inadequate due diligence of borrowers and lack of end-use monitoring, weak monitoring of loan-to-value ratios and incorrect application of risk weights.

The tightening of these norms has come as gold loans have become the fastest-growing loan book among banks. In February, loans extended by banks against gold jewellery rose 87% year-on-year to Rs 1.91 lakh crore, according to RBI's monthly sectoral data.

In another draft circular, the RBI said that the pool of stressed assets being securitised by any financial institutions must be homogenous.

It also proposed extending co-lending arrangements to all regulated entities, be they priority sector loans or outside this segment.

Also Read: RBI More Concerned About Tariff Impact On Growth Than Inflation, Says Governor Malhotra

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