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RBI Curbs Rules for Loans Against Gold, Jewelry

Mar 22, 2012 3:13 AM   By Dilipp S Nag
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RAPAPORT... The Reserve Bank of India (RBI) tightened rules for how non-banking financial companies (NBFCs) lend funds using gold and jewelry as collateral given such rapid growth of this activity.

NBFCs  have recorded significant growth in recent years and this has led to their
increased dependence on public funds, including bank finance and non-convertible debentures issued to retail investors, RBI said in a notification on Wednesday.

“Given the rapid pace of their business growth and the nature of their business model, which has inherent concentration risk,” exposes them to adverse movement in gold prices, RBI warned.

As a prudent measure, the central bank stated that NBFCs cannot lend more than 60 percent of the value of gold jewelry and they have to disclose the percentage of such loans to their total assets in their balance sheet. It added that companies whose loans comprise 50 percent or more of their financial assets should have a minimum tier 1 capital, or equity capital, of 12 percent by April 1, 2014.

RBI also prohibited NBFCs from lending against bullion, primary gold and gold coins.

NBFC provides loans that are secured by gold jewelry, primarily to individuals who face difficulty with formal credit in meeting their urgent cash requirements. The gold loans  provide easy access to cash, with little documentation and formality,  and the material remains in lockers to ensure their safety.

The industry has attracted a lot of new entrants seeing the success of the existing players, according to Muthoot Finance Ltd., a leading gold loan company. “We feel that the RBI has taken these steps in order to regulate the risk especially with respect to new entrants to the sector, who may not be aware of the various nuances of the business and also to strengthen the existing companies.”

The steps taken with respect to capital adequacy and loan-to-value  should be seen to strengthen the sector with better operating practices and risk control measures, Muthoot Finance noted.
Tags: Dilipp S Nag, gold, Gold Coins, Gold Loan, India, Jewelry, NBFCs, Rapaport, RBI, Reserve Bank of India
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