Brief Overview:
With the intention of fine-tuning credit practices and consumer protection, the RBI has introduced the ‘Draft RBI (Lending Against Gold Collateral) Directions, 2025’ (“Draft Directions”).
Applicability:
The Draft Directions apply to: (a) commercial banks (including small finance banks, local area banks and regional rural banks, excluding payments banks); (b) primary (urban) co-operative banks and rural co-operative banks; and (c) all non-banking finance companies, including housing finance companies (collectively the “REs”).
Intention:
The Draft Directions aim to introduce a harmonized set of rules across all REs, strengthen conduct related aspects, and address concerns witnessed in current lending practices.
Technical Details:
1) The Draft Directions categorise gold loans as ‘income generating’ and ‘consumption’ loans based on their end-use for customers.
2) Norms for lending against gold collateral is required to be included in the credit / risk management policy of the REs.
3) Restrictions on lending against primary gold / silver or financial assets backed by primary gold / silver like units of ETFs of MFs, re-pledged gold collateral, and doubtful ownership of collateral have been introduced.
4) REs will need to introduce internal ceilings on gold loan portfolio and quantum of loan to a single borrower as a part of their policy.
5) Valuational methodology has been standardised, whereby all REs will now be required to base valuation on 22-carat gold prices and use the India Bullion and Jewellers Association Ltd. quoted rates or Securities and Exchange Board of India (SEBI) regulated commodity exchange rates. Silver shall be valued at 999 purity silver prices.
6) REs will need to prescribe loan to value (“LTV”) ratio for the loans sanctioned against eligible gold collateral as part of their policies, with the maximum LTV ratio for consumption loans being capped at 75% of the value of gold. Breach of LTV ratio for more than 30 days shall attract additional standard asset provisioning at 1%.
7) Gold loans shall be made available pursuant to standardised documentation maintained across all branches of an RE.
8) The Draft Directions also cater to customers’ interests by advising the REs to, inter alia, provide mandatory certificate to customers assaying gold collateral, appoint qualified assayers / valuers, adopt language of the region or the language chosen by borrower for communications, maintain transparency in auction procedure upon default, and provide compensation in case of damage or undue delay in release of gold collateral.
9) The Draft Directions also address collateral management conduct and provide guidelines to REs on handling and storage of collateral and release of collateral after repayment.
10) REs shall, on a half-yearly basis, prepare and publish a report on unclaimed gold collateral to the Customer Service Committee or the Board.
Key Takeaways:
The Draft Directions aim to systematise the regulatory framework for gold loans, address the concerns observed over the lending practices being followed, provide necessary clarity, and strengthen the conduct-related aspects. Once formalised, the Draft Directions would redefine gold lending in India and streamline a currently fragmented ecosystem.
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