Mushrooming gold loan business now under RBI scanner

Oct 31 2011, 03:57 IST
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SummaryNo problem about banks which are entering into gold loan business.

The thriving gold loan business in India has come under the scanner of the Reserve Bank of India (RBI). With a sudden spurt in gold loan companies across the country, the regulator has put such companies under its watch to identify the possibility of any systemic risk.

“I’m not saying there’s a cause for concern. But certainly our bank regulation and supervision people are keeping a watch on that (gold loan business),” RBI Governor D Subbarao told The Indian Express.

When asked about the mushrooming gold loan companies and the impact on the financial system if gold prices crash in the future, Subbarao said, “Especially all the assets backed by gold is collateral and mobilisation of money is on that basis, there will certainly be a problem. Our people have told me they are examining it.”

What has attracted the attention of financial players is the steep rise in revenue and profits of some old players who were riding piggyback on the sharp rise in gold prices.

“Every Tom, Dick and Harry now wants to set up a gold loan business. There’s no problem about banks which are entering into gold loan business as they are already tightly monitored by the Reserve Bank of India . The new entrants function as non-banking financial companies (NBFCs). One issue is the source of money for such NBFCs to extend loans with gold as collateral. There could be asset-liability mismatches in the case of borrowed money,” said a banking source.

Most of these gold loan companies charge an interest rate of 24 per cent from their customers. As gold prices have zoomed by 35 per cent to over Rs 27,000 per 10 grams over the last one year, customers are flocking to gold loan companies — which now offer loans in “3 minutes”.

On the other hand, borrowers have to wait for months to get a loan from commercial banks even after submitting numerous documents. Seeing the change in the business pattern, the central bank had recently removed gold loan business from the priority sector lending list.

Apart from the robustness of their business models, a major worry is what will happen to the gold if prices crash suddenly. As the source of funds for gold loan companies is mostly bank borrowings, debenture issues and private equity funds, there’s also the possibility of systemic risk involved.

Outsmarting the performance of many public sector banks,

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