NBFCs, banks may continue to deliver gold loans: RBI panel

Moneycontrol Bureau

Gold loan non-banking finance companies (NBFCs) do not pose any immediate systemic risk to the financial system. Both banks and NBFCs may continue to deliver gold jewellery loans. Moreover, they should aim at introducing gold-backed financial instruments to unlock the value of idle yellow metal in the country, a Reserve Bank of India panel said in its draft report released on Wednesday.

"The financial performance of the gold loans NBFC's and the current level of their borrowings from the banking system are not of significant concern. There appears to be no immediate systemic implications in terms of domestic financial stability due to the interconnectedness of gold loans NBFCs and banking system," said the working committee, which was constituted under the chairmanship of K U B Rao, advisor, department of economic and policy research, RBI; to study the gold loan business in India.

However, the panel underscored the need to bring in more transparency in gold loan companies aided by close monitoring. For example, the panel urged to rationalise interest rate structure by gold loans NBFCs while it sees room for stricter monitoring due to the rapid growth of those companies.

The yawning current account deficit has necessitated a moderation in gold imports. In the this context, according to the RBI panel, it is critical to ensure real returns of investors through various financial savings products, so that their attention can be diverted away from gold, at least partly.

Rao committee therefore suggested to convert both rural and urban demand for gold into investment in gold-backed financial instruments through dematerialization of gold.

"Banks need to design innovative financial instruments that can provide real return to investors. Introduction of tax incentives on instruments that can impound idle gold may be considered," it recommended.

The committee was also against putting any curb on loans against gold jewellery and coins by individuals. However, it favoured prohibiting bank finance to purchases of gold bullion. Moreover, gold loan NBFCs need to improve their capital adequacy ratio.

Referring to the gold price movements, it sees little possibility of any sharp sudden drop to the tune of 30-40%.  

"The extant loan to value ratio should provide a reasonable risk cover in case the gold prices fall by 10%. Asset quality, NPAs as per cent of total credit exposure and capital adequacy of gold loan NBFCs are not a cause for concern at present," it concluded.

As per existing RBI norms, LTV ratio currently stands at 60%. This means, a customer has to pledge gold worth Rs 100 to get a loan of Rs 60 from any NBFC.

saikat.das@network18online.com