RBI issues draft rules for gold loans to standardise norms across lenders

On Wednesday, the Reserve Bank of India (RBI) issued a draft regulatory framework for loans secured by gold jewellery and ornaments, often referred to as gold loans. The action occurred soon after the central bank’s recent choice to lower the repo rate, signaling a broader initiative to improve credit practices and enhance consumer protection.

Taking into account their varying risk-bearing abilities, the RBI’s proposed framework seeks to establish a “uniform set of regulations” for all lenders, including banks, Non-Banking Finance Companies (NBFCs) like Housing Finance Companies (HFCs), co-operative banks, and regional rural banks (RRBs) engaged in gold-backed financing.

In today’s post-Monetary Policy press briefing, RBI Governor Sanjay Malhotra mentioned that the suggested guidelines regarding gold loans will not restrict such lending but rather make it more reasonable.

Key proposals in the draft guidelines:

– Lenders must incorporate gold loan norms into their credit and risk management policies.

– These policies must stipulate single-borrower and sectoral exposure limits for gold loan portfolios.

– Lending institutions must establish clear standards for gold valuation, purity verification, and processes to monitor the end-use of loan proceeds.

– All loans must be assessed against the borrower’s repayment capacity, with mandatory credit appraisal and due diligence.

– Lenders must implement systems for periodic monitoring of loan utilisation and maintain documentary evidence.

– Loan renewals and top-ups shall be permitted only if the existing facility is classified as standard and complies with the prescribed loan-to-value (LTV) ratio.

Lending restrictions:

– Advances must not be extended against primary gold, silver, or financial instruments backed by such primary metals.

– Borrowers shall not be permitted to avail concurrent loans for both consumption and income-generating purposes.

– Lenders must not accept gold under disputed ownership or accept gold that has already been pledged elsewhere as collateral.

Prescribed limits and caps:

– The maximum tenure for bullet repayment loans availed for consumption purposes is capped at 12 months.

– Co-operative banks and regional rural banks (RRBs) are allowed to issue bullet repayment loans up to Rs 5 lakh per borrower.

– For loans secured against gold ornaments and coins, the total weight of gold pledged must not exceed 1 kg per borrower.

– The weight of coins pledged must not exceed 50 grams of gold or silver.

– Only specially minted gold coins of 22 carats or higher purity, sold by banks, shall be accepted as collateral. Coins issued by other entities shall not be eligible.

The RBI has published the draft guidelines on its website for consultation and then, based on feedback, it will be finalised.