RBI proposes new draft norms for gold loans: Here’s what lenders and borrowers need to know

India's central bank, the Reserve Bank of India (RBI), issued a new draft guideline for gold loans on Wednesday, April 9. The draft guideline has directed that lenders have uniform documentation for such instruments to safeguard the people who borrow gold. 

According to the official RBI announcement, lenders who deal with gold loans are directed to ensure a “standardised procedure” that will help determine the purity of gold collateral, its weight (gross as well as net), etc. The procedure needs to be adopted uniformly across all branches of the lenders.

The details of all the procedures framed under the new draft guidelines will be visible on the lender's website for the ease of gold loan borrowers, according to a PTI report citing the central bank's announcement.

“Lenders shall ensure presence of the borrower(s) while assaying the collateral at the time of sanctioning the loan. The deductions relating to stone weight, fastenings, etc., as part of the assay procedure shall be explained to the borrower(s) and details incorporated in the certificate to be issued,” said RBI in the press release. 

Loan agreement disclosures

The RBI draft guidelines state that the loan agreement should cover the description of the gold collateral taken as security when issuing the loan and the total value of the gold collateral.

The agreement should also have details of the auction procedure and the circumstances leading to the auction of gold collateral, along with the notice period, which should be allowed to the borrower for repayment/ settlement of the loan before the auction is conducted.

The draft guidelines also specified that all the communication between the lender and the borrower of the gold loan should be in the local/regional language or the language preferred by the borrower, said RBI in its official statement. 

In case the borrower does not know how to read the agreement document, the lenders are mandated to explain the important terms and conditions of the agreement in the presence of a witness for acknowledgement.

Umesh Mohanan, the chief executive officer (CEO) of Indel Money, a company dealing in gold loans, told the news agency that RBI's key benchmark interest rate decision on Wednesday will lead to an overall improvement in the business sentiment and provide an uptick in the consumption with as rise in demand for gold loans.

This comes at a time when gold prices are near their all-time high levels, said Mohanan told the news agency.

(With inputs from PTI)