Reserve Bank: Clamps Down on Gold Loans by NBFCs

In a blow to NBFCs  (Non-Banking Finance Companies) in gold loan business, the RBI (Reserve Bank of India) has directed them not to give loans exceeding 60% of the value of the gold jewellery pledged with them.

NBFCs primarily engaged in lending against gold jewellery have been asked not to grant any advance against bullion/primary gold and gold coins. Further, they have to disclose in their balance-sheet the percentage of loans against gold jewellery to their total assets.

80% of the value of gold

Some NBFCs are known to give up to 80% of the value of gold as loans. By limiting the loan-to-value ratio to 60% and disallowing pledging of bullion / primary gold and gold coins, borrowing from gold loan companies could lose. he added.

The RBI has issued the directive as NBFCs lending against the security of gold jewellery have seen rapid business growth. This, in turn, has led to their increased dependence on public funds, including bank finance and non-convertible debentures issued to retail investors. The RBI observed that the nature of their business model has inherent concentration risk and is exposed to adverse movement of gold prices.
NBFCs primarily engaged in loan against gold jewellery (such loans comprising 50% or more of their financial assets) will be required to maintain a minimum Tier-l capital of 12% by April 1, 2014, the RBI said.
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