Mumbai: The Reserve Bank of India (RBI) on Wednesday released the recommendations of an internal panel on revision in gold loan rules and introduction of gold-backed products. The objective is to discourage investments in bullion, bars and jewellery, and curb gold imports.
The recommendations, if accepted in their entirety, will radically change the way gold loan lenders operate and customers approach gold as an asset class.
The public can comment on the report till 18 January.
The panel, led by K.U.B. Rao—an adviser to RBI’s department of economic and policy research—has suggested ways to encourage banks and non-banking finance companies (NBFCs) to use idle gold for productive purposes, while stipulating strict gold loan norms for NBFCs.
The panel has suggested a review of the cap on the loan-to-value ratio (LTV) of gold-loan NBFCs. It is in favour of raising the cap gradually. Currently, the ratio for gold loans by NBFCs is capped at 60%. This means for gold worth Rs.100 offered as collateral, lenders can give loans up to Rs.60. Mint reported the Rao panel’s recommendations on 5 November.
The panel’s recommendations include introduction of new gold-backed financial products to unlock value in idle gold, tax incentives on such instruments, converting demand for gold into investment in gold-backed financial instruments through dematerialization, and revisiting fiscal measures to curb imports of yellow metal.
The new products, according to the panel, could be in the form of gold accumulation plans, gold-linked accounts, modified gold deposits and gold pension products, the panel said. Also, there is a need to review the current stipulations pertaining to the raising of resources through non-convertible debentures by gold loan NBFCs, the panel said.
RBI’s concerns stem from rising gold imports leading to a widening of the current account deficit. The current account deficit—the difference between a country’s import and export of goods, services and transfers—was at a record high of 5.4% in the September quarter, compared with 3.9% in the June-quarter and 4.2% in fiscal year 2011-12. Transfers comprise currency transfers by one country to another in the form of aid or donations.
India is the largest importer of gold. In fiscal year 2012, India imported gold worth $62 billion against $43 billion in the previous year. Between April and June, gold imports rose 38% to 181.3 tonnes from the year earlier, according to World Gold Council (WGC) data.
Noting that the striking growth of gold-loan NBFCs warrants that their operations be closely monitored, the panel said some had been raising public deposits surreptitiously through unincorporated bodies.
The panel has, however, ruled out treating gold-loan NBFCs in a similar manner as commercial banks.
Gold loan NBFCs also need to follow proper disclosure standards, monitor the implementation of the fair practices code and standardize the documentation process, the panel said.
Most importantly, gold loan NBFCs need to rationalize the interest rate structure, the panel said. Such NBFCs typically charge 24-26% interest to borrowers.
Officials of the gold loan sector said the panel recommendations will help the industry gain credibility in the long term. “RBI has clearly acknowledged that gold loans NBFCs are doing a socially useful function,” said John Muthoot, chairman and managing director of Muthoot Fincorp.
Santosh Singh, analyst at Espirito Santo Securities, said most of the recommendations by the working group are already being implemented by the RBI.