Mumbai, Sept. 17: The Reserve Bank of India (RBI) has tightened rules on gold loans disbursed by non-banking finance companies (NBFCs). It standardised the way in which gold jewellery accepted as collateral would be valued and tweaked the process where gold kept as collateral is auctioned in the event of default by the borrower.
Further, India’s central bank has now stipulated that NBFCs engaged in this business must seek its approval for opening branches exceeding 1000, adding that approvals will not be given to new branches that do not have a storage facility.
The new norms were announced through a notification issued late on Monday. It resulted in the share prices of gold loan companies such as Manappuram Finance and Muthoot Finance falling 4.62 per cent and 8.28 per cent, respectively, in trades today. The stocks fell as investors feared that the new restrictions would hurt expansion plans of the gold NBFCs.
The RBI, which has been taking measures along with the government to curb gold imports, had earlier appointed a working group to study the issues related to gold imports and gold loan NBFCs in India under the chairmanship of K.U.B. Rao. The working group submitted its report in January.
The central bank said most of the recommendations relating to lending against the collateral of gold jewellery had been accepted.
At present, there is no standard method to assess the value of gold accepted as collateral and the valuation is arbitrary and opaque.
In order to standardise the valuation and make it more transparent to the borrower, the RBI has decided that gold jewellery accepted as collateral should be valued at the average of the closing price of 22 carat gold for the preceding 30 days as quoted by The Bombay Bullion Association (BBA).
It added that while accepting the gold as collateral, the NBFC should give in writing to the borrower, on their letterhead, stating the purity (in terms of carats) and weight of the gold. While jewellery of lower purity of gold will be valued proportionately, the loan-to-value ratio (LTV) for loans against jewellery has been retained at 60 per cent. This means that for gold jewellery worth Rs 100 placed as collateral, the bank can give loans up to Rs 60.
Expressing concern that NBFCs extending loans against gold jewellery have been expanding at a very rapid pace, often at the cost of internal controls, it has now been ruled that henceforth an NBFC must obtain prior approval of the Reserve Bank to open branches in excess of 1,000.
In the case of NBFCs that already have more than 1,000 branches, they will have to approach the RBI for prior approval before opening any new branches. No new branches will be allowed without facilities for storage of gold jewellery and minimum security facilities for the pledged gold jewellery.
Both Muthoot and Manappuram have more than 3,000 branches each in the country. Gold loan outstanding at Manappuram at the end of June 30 stood at nearly Rs 9,160 crore. During the period, it disbursed gold loans worth Rs 3,967 crore.
The central bank has also laid down a standard procedure for the auction of gold mortgaged by loan defaulters.
The NBFCs must declare a reserve price for the pledged ornaments, while auctioning them.
The reserve price for the pledged ornaments should not be less than 85 per cent of the previous 30 day average closing price of 22 carat gold as declared by the BBA.