RBI for tighter regulations on gold loans

 At a time when the credit offtake in the banking system is not picking up, the Reserve Bank of India (RBI) has a different problem to contend with in the form of loans-against-gold which is growing very fast.

So much so, two listed gold loan firms, Manappuram Finance and Muthoot Finance reported a strong growth in earnings for the third quarter as compared with the overall demand for loans in the corporate segment seeing a considerable decline.

In the given situation, RBI is now contemplating tighter regulations for the segment, which could be in the form of limits on the loan that a gold loan firm can give as a percentage of the value of mortgage. This is also known as the loan-to-value, said a top RBI official.

For instance, if loan was being given up to 85 per cent of value earlier, RBI may now think of prescribing upto 70 per cent only. The apex bank may also restrict the maximum interest that a gold loan firm can charge its customers, and also the penalties that gold loan firms can impose. Currently, they charge anywhere between 18-24 per cent as interest.

Also, the interest rate depends on the ticket size of the loan.  Higher the loan-to-value, more will be rate of interest. So, RBI will also be considering rules to ensure better protection for customers availing gold loans. As people who avail loans against gold are mostly from the unorganised sector, having no access to bank credit.

It may be noted that RBI had removed priority sector tag for loans given by banks to gold loan firms last year, which effectively meant that gold loan firms would have to pay market rates for borrowing money from banks, instead of the concessional rate they would get for a priority sector loan.

Early this week, the RBI barred Manappuram Finance from accepting public deposits.