The Reserve Bank had, on September 16, 2013 issued instructions to NBFCs for lending against gold jewellery (referred to as ‘the circular’). The Reserve Bank, in January 2014, revised its instructions partially in the wake of the Reserve Bank receiving certain representations from NBFCs. According to the revised instructions:
i) Loan-To-Value (LTV) Ratio
In view of the moderation in the growth of gold loan portfolios of NBFCs in the recent past, and also taking into consideration the experience so far, it has been decided to raise the Loan-to-Value (LTV) ratio to up to 75 per cent for loans against the collateral of gold jewellery from the present limit of 60 per cent with immediate effect.
The Reserve Bank further clarified that the value of the jewellery for the purpose of determining the maximum permissible loan amount will be only the intrinsic value of the gold content and no other cost elements should be added to it. The intrinsic value will continue to be arrived at as detailed in ‘the circular’. It was understood that some NBFCs were adding making charges, etc., to the value of the gold jewellery determined in terms of paragraph 2(iii) of ‘the circular’.
ii) Standardisation of Value of Gold in arriving at LTV Ratio
The Reserve Bank has clarified that the need to give a certificate on the purity of gold cannot be dispensed with. The certified purity should be applied for determining the maximum permissible loan and the reserve price for auction. The NBFCs can, however, include suitable caveats to protect themselves against disputes on redemption.
As per para 2 (iii) of ‘the circular’, NBFCs were required to give in writing to the borrower the purity (in terms of carats) and weight of gold. NBFCs had raised apprehensions on certifying the purity of the gold jewellery accepted as collateral on grounds that under the current practices it was possible only to arrive at the proximate purity of the gold and that such a certification could lead to dispute with the borrowers.
iii) Verification of the Ownership of Gold
In view of the fact that it may not be possible for borrowers to produce receipts establishing ownership, especially when the jewellery has been inherited, the Reserve Bank clarified that the ownership verification need not necessarily be through original receipts for the jewellery pledged but a suitable document may be prepared to explain how the ownership was determined, particularly in each and every case where the gold jewellery pledged by a borrower at any one time or cumulatively on loan outstanding is more than 20 grams. The Reserve Bank has also directed NBFCs to have an explicit policy in this regard in their overall loan policy.
In terms of para 2 (iv) of ‘the circular’, NBFCs were required to keep a record of verification of ownership of the jewellery where the gold jewellery pledged by a borrower at any one time or cumulatively on loan outstanding is more than 20 grams. Also, NBFCs were required to lay down the method of establishing ownership in its overall loan policy approved by its Board.
iv) Auction Process and Procedures
In terms of para 2 v of ‘the circular’, NBFCs were directed to conduct the auction in the same town or taluk in which the branch that had extended the loan is located. Representations have been received seeking permission to conduct auction in the district rather than the taluk. The Reserve Bank has not found it feasible to accept this request and as such the current instructions remain unchanged.
v) Other Instructions
In terms of para 2 vi (ii) of ‘the circular’, NBFCs were directed to disburse high value loans of ` one lakh and above, only through cheque. NBFCs had represented that payment by issue of cheques would lead to delay in the borrower getting access to the funds and the delays could be accentuated where disbursements happen during weekends. It is observed that a majority of the loans in the portfolio of NBFCs is below ` one lakh. It has, therefore, been decided to retain the current instructions in this regard
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