Why is the RBI proposing changes to gold loan regulations?

In April 2024, the Reserve Bank of India (RBI) released draft guidelines on loans against gold to harmonise regulations across banks and NBFCs and to address irregularities. The move follows an extraordinary surge in gold-backed loans during FY24:

• Gold loan portfolios grew over 50% across banks and NBFCs.
• For banks, the portfolio more than doubled (104% growth).

This rapid growth, amid rising gold prices and lax lending standards, raised regulatory concerns.

What are the key proposals in the draft guidelines?

• LTV Norms:
  • The Loan-to-Value (LTV) ratio remains capped at 75%.
  • For bullet repayment loans for consumption, accrued interest must be included in the LTV calculation, effectively lowering the loan amount disbursed.
• Ownership Proof:Borrowers must furnish proof of ownership for the gold pledged.
• Valuation Standards:
  • Gold should be valued based on 22-carat price.
  • Uniform procedures must be followed to assess the purity and weight.
• Loan Renewal & Fresh Sanctions:
  • Renewals or top-ups are permitted only if:
    • The existing loan is standard, and
    • It complies with the LTV limit.
  • Concurrent loans for both consumption and income-generation are disallowed.
  • A fresh loan can only be granted after full repayment (principal + interest) of the previous loan.
• Collateral Return Timeline:If the gold is not returned within 7 working days after repayment, the lender must compensate the borrower at ?5,000/day for each day of delay.

Likely Impact on Borrowers and Lenders

Borrowers:

• May face reduced loan amounts and higher documentation requirements.
• Small and rural borrowers, dependent on gold loans for agriculture and allied sectors, may experience reduced accessibility.

NBFCs and Banks:

• NBFCs that frequently renew or top-up gold loans could lose flexibility.
• Compliance costs will rise due to stringent documentation, valuation, and reporting norms.
• Smaller NBFCs relying on re-pledging of gold may face liquidity issues.
• Interest rates may rise to offset higher operational expenses.

Is a uniform policy suitable?

A one-size-fits-all policy may not be practical. Gold loans are a lifeline for rural households with limited access to formal credit. Experts suggest:

• Differentiated norms for micro gold loans (small-ticket loans) and high-value loans.
• Consideration for the informal nature of ownership in many rural households.