India’s Central Bank Reserve Bank of India (RBI) has recently issued draft guidelines for ‘Lending Against Gold Collateral’. Through this Directive, the RBI has placed restrictions on giving loans against primary gold or gold bullions owing to the non-productive nature of gold, which is also of speculative nature. The main objective is to streamline and standardise the gold-loan-issuing procedures across banks and non-banking financial institutions (NBFCs).
Whether borrowers choose to borrow from banks or from NBFCs, these guidelines would provide them with clarity on terms and conditions of the loan availed.
To help borrowers meet their short-term financial needs, the RBI has allowed the Regulated Entities (REs) to lend loans against collateral security of gold jewellery and ornaments. However, the guidelines have clearly mentioned that lenders cannot not give loans against financial assets backed by gold/silver units of Exchange-Traded Funds (ETFs) or units of Mutual Funds. Let’s gain a glimpse into the key changes proposed in the draft guidelines.
Loan to Value Ratio (LTV)
As per RBI’s draft guidelines, irrespective of the reasons for which the loans are sought, the maximum amount sanctioned for consumption gold loans should not exceed 75% of the value of gold given as collateral, that is pledged by the borrower for availing a loan. The LTV ceiling of 75% is applicable to all banks and NBFCs. For instance, if the market value of your gold jewellery is ₹1,00,000, the maximum loan amount sanctioned would only be ₹75,000.
RBI guidelines mention, “If there is any breach of regulatory in maintaining the LTV ratio for more than 30 consecutive days, the entire outstanding amount would attract an additional standard asset provisioning of 1%. If the loan is in breach of LTV ratio as on the date of maturity, no renewal shall be permitted.”
The LTV restriction comes as a shock to customers as it was relaxed earlier during the period of COVID-19 pandemic and was allowed up to 80% of the value of the gold given as collateral.
Proof of ownership
The draft guidelines have strictly mentioned that lenders should not provide loans in cases where the ownership of the collateral is doubtful. Further, the lenders must maintain a record of the verification of the ownership of the collateral. However, one need not worry if the original bills for the purchase of gold jewellery are not available. A suitable document/declaration explaining how the ownership of the collateral has been determined can be collected from the borrower.
Purity certificate
At the time of accepting gold collateral for the purpose of lending loan, lenders must either prepare a certificate/e-certificate (in duplicate on their letterhead) with regard to the assaying of the collateral. RBI states, “Lenders have to mention the purity (in terms of carats); gross weight of the gold collateral; net weight of gold content and deductions, if any, relating to weight of stones, lac, alloy, strings, fastenings, etc.; damage/ breakage/ defects, if any, noticed in the collateral; image of the collateral; and the value of collateral arrived at the time of sanction.”
Further, it is mandatory that the certificate/e-certificate should be signed by both the lender as well as the borrower. One copy of the certificate/e-certificate must be maintained as part of the loan documents and the second copy must be given to the borrowers, with acknowledgement.
Not all gold eligible for collateral
Borrowers cannot pledge all type of gold/bullion bars. Gold jewellery, gold ornaments and only specified gold coins are eligible for collateral for availing loans. For instance, coins sold by entities other than banks would not be considered as specified coins. Financial experts say that coins manufactured by MMTC, if sold through banks, would be qualified as a collateral, provided other conditions are met with.
Limits on collateral
RBI has mentioned in its draft proposal that the aggregate weight of either gold or silver ornaments pledged for loan should not exceed one kilogram per borrower. Further, the aggregate weight of specified gold coin(s) given as collateral for loan should not exceed 50 grams per borrower and specified silver coins should not exceed 500 grams per borrower. The coins must be specially minted gold coins with a purity of 22 carats or higher, sold by banks. Coins sold by entities other than banks would not be accepted as collateral for loans.
Silver as collateral for first time
Silver is accepted as a collateral and would be valued at 999 purity silver prices. Borrowers can avail loan keeping silver jewellery, silver ornaments and bank-sold silver coins as a collateral. However, it must be noted that not all silver coins could be pledged. Only specially minted silver coins sold by banks with a minimum purity of 925 would be accepted.
Standardised gold valuation
Gold jewellery, gold ornaments or gold coins accepted as a collateral would be valued based on the price of 22 carat gold. Even if the gold collateral pledged is of less than 22 carats purity, the lender must translate it into collateral equivalent of 22 carat purity and value the collateral proportionately.
Timely release of collateral
It is mandatory that upon full repayment/settlement of the loan, lenders, be it banks or the NBFCs, must release/return the gold collateral held as security to the borrower(s)/legal heir(s) within a maximum period of seven working days.
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