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RBI tightens rules on lending against gold jewellery

NBFCs should not issue misleading advertisements like claiming the availability of loans in a matter of 2-3 minutes, RBI said

September 17, 2013 10:15 IST | India Infoline News Service
The RBI on Monday has tightened rules governing non-banking financial companies (NBFCs) lending against gold jewellery.

Appropriate infrastructure for storage of gold ornaments
The RBI said that a minimum level of physical infrastructure and facilities is available in each of the branches engaged in financing against gold jewellery including a safe deposit vault and appropriate security measures for operating the vault to ensure safety of the gold and borrower convenience.

Existing NBFCs should review the arrangements in place at their branches and ensure that necessary infrastructure is put in place at the earliest, RBI said in a notification on Monday.

No new branches should be opened without suitable storage arrangements having been made thereat. Applicants seeking registration as NBFCs from RBI and which have a business plan to engage primarily in lending against the collateral of gold ornaments (such loans comprising 50% or more of their financial assets) will also have to ensure at the stage of submission of application for CoR that they have a proper infrastructure for storage and security at all places/branches of the company. 

No business of grant of loans against the security of gold can be transacted at places where there are no proper facilities for storage/security, the notification added.

Prior approval of RBI for opening branches in excess of 1,000 in number
It is mandatory for NBFC to obtain prior approval of RBI to open branches exceeding 1,000. However NBFCs which already have more than 1,000 branches may approach RBI for prior approval for any further branch expansion. Besides, no new branches will be allowed to be opened without the facilities for storage of gold jewellery and minimum security facilities for the pledged gold jewellery.

Standardisation of value of gold in arriving at LTV ratio
Gold jewellery accepted as collateral will have to be valued at the average of the closing price of 22 carat gold for the preceding 30 days as quoted by The Bombay Bullion Association Ltd (BBA). While accepting the gold as collateral, the NBFC should give in writing to the borrower, on their letter head giving the purity (in terms of carats) and weight of the gold, RBI further said.

If the gold is of purity less than 22 carats, the NBFC should translate the collateral into 22 carat and state the exact grams of the collateral. In other words, jewellery of lower purity of gold shall be valued proportionately.  It is reiterated that the LTV Ratio for loans against jewellery continues to be at 60%, it added.

Verification of the ownership of gold
Where the gold jewellery pledged by a borrower at any one time or cumulatively on loan outstanding is more than 20 grams, NBFCs must keep record of the verification of the ownership of the jewellery. The method of establishing ownership should be laid down as a Board approved policy, RBI said.

Auction process and procedures
The following additional stipulations are made with respect to auctioning of pledged gold jewellery:

The auction should be conducted in the same town or taluka in which the branch that has extended the loan is located.

While auctioning the gold the NBFC should declare a reserve price for the pledged ornaments. The reserve price for the pledged ornaments should not be less than 85% of the previous 30 day average closing price of 22 carat gold as declared by The Bombay Bullion Association Ltd (BBA) and value of the jewellery of lower purity in terms of carats should be proportionately reduced.

It will be mandatory on the part of the NBFCs to provide full details of the  value fetched in the auction and the outstanding dues adjusted and any amount over and above the loan outstanding should be payable to the borrower.

NBFCs must disclose in their annual reports the details of the auctions conducted during the financial year including the number of loan accounts, outstanding amounts, value fetched and whether any of its sister concerns participated in the auction.

Other Instructions
NBFCs financing against the collateral of gold must insist on a copy of the PAN Card of the borrower for all transaction above Rs. 5 lakh.

High value loans of Rs. 1 lakh and above must only be disbursed by cheque.
Documentation across all branches must be standardized.

NBFCs shall not issue misleading advertisements like claiming the availability of loans in a matter of 2-3 minutes.

The guidelines issued by the central bank for lending gold against jewellery are broadly based on the recommendations made by the Working Group set up by RBI, under the Chairmanship of KUB Rao.

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