Banks asked to cut exposure to NBFC's giving gold loans

Worried over a spurt in gold imports, RBI, on Friday, asked banks to reduce exposure to NBFCs, which give loan against the precious metal, at the earliest and bring it under the prescribed limit within six months.

“Banks which currently have exposures to such NBFC’s (giving gold loans) in excess of the regulatory ceiling will be required to reduce their exposure at the earliest but not later than six months,” RBI said in circular.

Banks, according to the circular, are required to bring down their exposure ceiling to such NBFCs from 10 per cent to 7.5 per cent of its capital funds. The ceiling will apply to those NBFCs predominantly engaged in lending against gold and have provided such loans to the extent of 50 per cent or more of its total advances. The apex bank has issued this circular in view of rapid growth of such business and inherent risk involved in such activities.

RBI had earlier flagged its concerns about the issue in the annual monetary policy unveiled last month and had said that it would come out with detailed guidelines on that.

This rule, RBI said, will not apply to those gold loan giving NBFCs if the additional fund provided by banks are meant on lending to infrastructure sector. In that case, the exposure limit will be at a higher level of 12.5 per cent.

The RBI had also set up a Working Group to conduct a detailed study of the issues connected with rising gold import and loans. The group was asked to submit its report by July-end. On several ocassions, even Finance Minister Pranab Mukherjee had expressed concern over import of gold and silver which during the first 11 months of the last fiscal stood at $54.5 billion. Gold has become the second largest imported commodity after crude oil.