Fearing that a rapid growth in the gold loans in the past few years could destabilize the banking system and harm retail investors on the back of fall in gold prices, the Reserve Bank of India (RBI) has tightened the norms for extending gold loans by the non banking financial companies (NBFCs). The RBI is worried that the rapid rise in these loans is exposing the banking system and retail investors to price fluctuations of the yellow metal.
NBFCs have seen almost a 50% annual growth in loans against gold. This is due to the fact that the rising price of the metal has prompted those people to borrow from NBFCs who do not have access to banks. Since business has been booming, the NBFCs have been borrowing substantially from banks and also through sale of bonds.
Since profit margins are high, investors have been increasingly purchasing bonds and stocks of gold loan companies. The apex bank is however concerned that since these companies lend 70-75% of the value of gold, a fall in prices could destabilize the system.
As per the new norms, the loan-to-value ratio should not exceed 60% for loans granted against the collateral of gold jewellery. The NBFCs which is having 50% or more of their financial assets in loans against gold shall maintain a minimum Tier l capital of 12% from by April 2014.
Moreover, the central bank has directed NBFCs to disclose the share of gold loans in their credit portfolio. It has also banned companies from lending against bullion, primary gold and gold coins, leaving just jewellery.
The regulation is expected to affect businesses of NBFCs. Borrowers may also have to revert to local moneylenders for their loan requirements. However it is still unclear whether this cap will be applicable to the existing portfolio or to new ones.
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