As per the new norms, each bank, as per the board-approved policy, can decide on the loan amount ceiling against the pledge of gold jewellery and ornaments. The duration of the loan, however, cant be more than 12 months from the date of the sanction.
Banks will have to maintain a loan-to-value (LTV) ratio of 75% throughout the loan tenure. For valuation of gold, they will have to use the historical spot gold price data given by the Forward Markets Commission, in addition to the data on prices from the Indian Bullion and Jewellers Association.
The RBIs recent circular follows representation from banks, requesting the regulator to increase the ceiling and review other conditions applicable for non-agricultural loans pledged against gold ornaments and jewellery. Analysts say banks will now increase their ceiling for loan against gold collateral for non-agricultural end-usage.
The RBI, in an earlier circular issued on December 30, 2013, had fixed the maximum amount of loan that could be sanctioned against pledge of gold ornaments and jewellery for non-agricultural purposes at R1 lakh at any point of time. It also said that the period of the loan should not exceed 12 months from the date of sanction. The interest would be charged to the account on a monthly basis, but would become due for payment, along with the principal, only at the maturity, it had said. The RBI also decided to permit bullet repayment of loans.
A month later, on January 20, 2014, RBI issued another circular where it fixed an LTV ratio of not more than 75% for banks lending against gold jewellery. Also, to standardise the valuation process, it decided that gold jewellery accepted as security or collateral would have to be valued at the average of the closing price of 22-carat gold for the preceding 30 days as quoted by the Indian Bullion and Jewellers Association. If the gold is of below-22-carat purity, the bank would need to convert the collateral into 22 carat and make an exact valuation.
For non-banking financial companies (NBFCs) too, the RBI, in January, raised the LTV ratio to up to 75% from 60%, as per the recommendation of the KUB Rao working group report. Earlier, NBFCs used to add making charges to the value of the jewellery, but the central bank clarified that only the intrinsic value of the gold would have to be taken into consideration.
According to the World Gold Council, India has the worlds largest stock of privately held gold at 20,000 tonne, which comes to 10% of global stock.
Experts say when people borrow against gold, it can start a chain of productive economic activity, boosting demand and consumption. Banks typically charge interest rates between 10% and 18% per annum for gold loans; NBFCs keep these rates slightly higher at 15-25%. Processing costs range between 0.5% and 1.5%. In India, about 75% of gold loan finance is in the unorganised sector, where the chances of the financier shutting shop or not returning gold are high. However, the entry of banks and NBFCs has infused confidence among consumers, who now view gold as an asset that can be monetised and not just a precious commodity.
Borrowing against gold is one of the popular instruments based on physical pledge of gold and it has been working well with Indian rural households mindset, which typically views gold as an important saving instrument that is liquid and can be converted into cash instantly to meet any urgent needs, says the KUB Rao working group report on issues related to gold loan NBFCs in India.
The market is very well established in the southern states, which accounts for the highest accumulated gold stock in the country.
Banks find it safe to lend against gold, while customers get loans faster, with less documentation and even at lower rates of interest.
For documentation, banks need address and identity proofs. Customers also need to prove ownership of gold being pledged. Some banks may even ask for a no-objection certificate from the lady of the house.
After the loan amount and the interest are repaid, the customer gets back the gold in exactly the same state and weight that one gave at the time of taking the loan. Experts say a customer must keep in mind the credibility of the financing company. Some banks even place restrictions on using the money for speculative purposes and stock trading.