The RBI said that the proposed framework aims to improve conduct and address issues in current lending practices
In a bid to make gold-backed loans safer and more transparent, the Reserve Bank of India (RBI) on April 9 issued a draft framework to regulate gold loans across all financial entities. The new guidelines aim to create a harmonised regulatory framework for gold-backed loans across all lenders, address issues with current lending practices and clarify any confusion and strengthen how these loans are handled and regulated.
The proposed guidelines, the central bank said, shall apply to commercial banks, such as small finance banks, local area banks, and regional rural banks, but excluding payments banks. The rules also apply to primary (urban) co-operative banks, rural co-operative banks, state co-operative banks (StCBs), and central co-operative banks (CCBs). Further, all non-banking financial companies (NBFCs), including housing finance companies (HFCs), are also subject to these regulations, the RBI said.
Lenders will need to include the guidelines for lending against gold collateral in their credit and risk management policies.
Lenders must set up proper systems and controls to regularly monitor and record the end-use of these loans.
Loan renewals and top-up loans can only be approved if the existing loan is classified as 'standard' and there is enough room within the allowed Loan-to-Value (LTV) ratio, which is set at 75 per cent. Lenders must ensure this ratio is maintained throughout the loan's duration. If the LTV exceeds the limit for more than 30 consecutive days, an additional 1 per cent provisioning will be required.
Lending against primary gold, silver, or fold- and silver-backed financial assets, such as exchange traded funds (ETFs) or mutual fund units, is restricted.
For bullet repayment loans, where both principal and interest are paid at maturity, the loan tenure is limited to 12 months for consumption loans. Regional Rural Banks (RRBs) and cooperative banks also face a Rs 5 lakh cap per borrower for such loans.
Lenders must involve borrowers during the gold valuation process and provide detailed certificates showing purity and weight. If a loan defaults, the auction process must be transparent, with public notices, a reserve price of at least 90 per cent of the market value, and any surplus proceeds refunded to the borrower within seven days.
If lenders delay the release of pledged gold beyond seven days after full repayment, they will have to compensate borrowers Rs 5,000 per day.
Gold collateral must be stored securely in branch vaults, and periodic surprise audits should be conducted. Lenders are encouraged to offer better terms for hallmarked gold and give it preference.
Regulated entities must disclose the size of their gold loan portfolios as a percentage of total assets in their financial statements, breaking it down into income-generating and consumption loans.