The Reserve Bank of India has issued draft regulations for loan against gold as collateral on April 9, as a part of a move towards 'principle-based and harmonised regulatory framework' to enhance underwriting, improve collateral management and to monitor the end-use of funds.
The regulatory objectives behind these revised directions are to put in place a harmonized regulatory framework for such loans applicable across various regulated entities, and to address concerns over some of the lending practices being followed. The RBI draft added that one more objective of the paper is to strengthen the conduct-related aspects for the lenders.
These draft directions shall apply to all gold loans offered by lenders, including Small Finance Banks, Regional Rural Banks, excluding Payments Banks, Co-operative Banks and all NBFCs and Housing Finance Companies (HFCs).
The draft proposal also includes setting up of appropriate borrower limits, mechanisms to monitor end-use, and standardised way of testing the gold's purity.
Key Highlights
The norms for lending against gold collateral shall have to be included in the credit/risk management policy of the lenders, said the draft guidelines.
Lenders shall have to put in place 'proper systems and controls' to ensure that the end-use of these loans are periodically monitored and recorded.
All loan renewals, and top-up loans, shall be sanctioned if the existing loan is classified as 'standard', and there is headroom available within the permissible LTV ratio, said the draft.
Lenders shall not grant any advance against primary gold or silver, backed by similar units of Exchange-Traded Funds (ETFs) or mutual funds, RBI draft said.
According to RBI, the same gold collateral will 'not be permitted to be used concurrently' for extending loans for income generating purposes or consumption loans.
Lenders shall not be allowed to extend loans against any re-pledged gold collateral, said RBI. Lenders shall also not extend loans where ownership of the collateral is doubtful, said the draft.
RBI also proposed to make it essential to use a standardised process to assess the weight and purity of the gold collateral.
Shares of gold loan financiers such as Manappuram Finance and Muthoot Finance had taken a sharp knock in trade on April 9, after the RBI Governor announced the proposed draft regulation, and the shares recovered marginally, after the he clarified during the press briefing that there was no mention of any 'tightening' of regulation, and the only objective was to rationalise the regulation.
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