RBI releases final guidelines for Lending Against Gold and Silver Collateral

lenders must not avail loans by re-pledging gold or silver that has already been pledged to them by their borrowers.

The Reserve Bank of India (RBI) on June 6 released the final guidelines for lending against gold and silver collateral.

This comes shortly after RBI Governor Sanjay Malhotra, during the post-policy press conference, had stated that the guidelines would be released either today or on Monday.

According to the guidelines, lenders shall not grant any advance or loan against primary gold or silver, or financial assets backed by primary gold or silver—such as units of Exchange-Traded Funds (ETFs) or units of Mutual Funds.

Loans should also not be granted where the ownership of the gold is doubtful. A suitable document or declaration must be obtained from the borrower in all cases, affirming that the borrower is the rightful owner of the eligible collateral.

Additionally, lenders must not avail loans by re-pledging gold or silver that has already been pledged to them by their borrowers.

On the valuation front, the RBI stated that gold or silver accepted as collateral shall be valued based on the reference price corresponding to its actual purity (caratage). For this purpose, the lower of:

(a) the average closing price over the preceding 30 days for gold or silver of that specific purity, or
(b) the closing price of the previous day for gold or silver of that specific purity,

as published either by the India Bullion and Jewellers Association Ltd. (IBJA) or by a commodity exchange regulated by the Securities and Exchange Board of India (SEBI), shall be used.

The guidelines prescribe the following maximum loan-to-value (LTV) ratios:

Up to Rs 2.5 lakh: 85 percent
Between Rs 2.5 lakh to Rs 5 lakh: 80 percent
Above Rs 5 lakh: 75 percent
The prescribed LTV ratio must be maintained on an ongoing basis throughout the tenor of the loan, the RBI stated.

Documentation shall be standardised across all branches of a lender.

The RBI further added that the loan agreement must include:

A description of the eligible collateral taken as security
The value of such collateral
Details of the auction procedure and the circumstances that could lead to the auction of the collateral
The notice period to be given to the borrower for repayment or settlement before the auction
Timelines for release of the pledged collateral upon full repayment or settlement
Details of any refund of surplus from the auction, if applicable
Other necessary terms and conditions