Reserve Bank tightens rules for lending on gold

The Reserve Bank of India (RBI) has tightened rules for finance companies which lend against gold in line with the recommendations of an internal panel.

In a notification, the RBI stated that the recommendations of the panel headed by K U B Rao related to NBFCs lending against the collateral of gold jewellery have been broadly accepted by the central bank, which led issuing guidelines now.

Accordingly, the RBI said lenders need to value the pledged gold at the average closing price of 22-carat gold for the preceding 30 days as quoted by the Bombay Bullion Association Ltd, to arrive at the loan-to-value ratio, while the ratio would remain at 60 per cent for loans against jewellery.

"Currently, there is no standard method for arriving at the value of gold accepted as collateral and valuation is arbitrary and opaque," said the notification.

Also, the RBI streamlined the process by which lenders auction gold when a borrower defaults, saying lenders need to declare a reserve price for the pledged ornaments.  Lenders would also need RBI approval to open branches exceeding 1,000 and no new ones would be allowed without adequate storage facility for gold.

As such, some of the existing listed entities like Muthoot Finance and Manappuram Finance having 3,801 and 3,293 branches respectively may be affected by the RBI's notification.  
"Unbridled growth may not be in the overall interests of the concerned NBFC or the sector and there is a need for consolidation of the existing network," the central bank said.