Swaraat / CA N S Padmanabhan
The Reserve Bank of India has brought in crucial new gold loan rules. RBI has mentioned that to increase transparency and usher borrower friendly measures these rules are brought forth.
Capping of Loan to value
The new rules cap the overall lending to 75% of total value of gold, reducing the extant limit of 80 to 85 percent. This ceiling is across all sectors of banking and Non Banking Financial Companies. It defies how this can be a borrower friendly measure.
Proof of Ownership
Indian domestic sector is said to be holding more than twenty thousand tonnes of Gold in the form of ornaments. Recognizing this former Finance Minister Shri Arun Jaitley (Late) brought Gold Monetisation scheme. Traditionally Indian households gifts gold during marriages as a backup for all kinds of emergencies. Even before RBI adopted gold backed standard, Indian households were using it for ages. Most of the chunk of gold are inherited or received during occasions. Proof of formal ownership is virtual and non-existent. Notwithstanding this RBI has insisted on affidavits declaring ownership. More procedural hardship and it is more of lender friendly rather than borrower friendly.
Standardised Valuation
Lenders are to value gold based on purity and standardised valuation based in 22 carat gold purity. 22 carat will be used as base valuation. However, this raises the question, if the Gold purity is less than 22 carat will the banks lend? Defections for stones and other ornamental additions to be done in the presence of borrower.
Restrictions on ETF, mutual Funds, coins bullions and ingots
No gold loan shall be given on mutual fund gold units or exchange traded gold funds. This defies logic as it was the Government which encourage monetisation of gold in various forms. Gold biscuits, coins or ingots are ineligible. The lender must give purity and valuation certificate accordingly. Even at present, empanelled jewel appraisers virtually run the show at banks. Bankers must don the role of jewellers whilst issuing purity certificates. This will be additional stress on banks and overdependence on appraisers.
Detailed Loan Agreement
RBI has stipulated a detailed loan agreement mentioning the purity and other details of the Gold given as collateral security.
Release of collateral within seven days of repayment.
Perhaps this is the borrower friendly measure requiring the lender to release the security within 7 days of settlement of the loan.
Conclusion
The capping of loan to value at 75 percent, the proof of ownership requirement, the overall ceiling of 1 kg per borrower may be an impediment for borrowers. Agriculture credit will take a straight hit, and small borrowers will be affected. No doubt, the Tamil Nadu Chief Minister has raised concern on this.
The finance minister has written to Reserve Bank of India that small borrowers should not be affected. These draft proposals may be relaxed for loans up to Rs 2 lakhs. As of now the draft rules provide hardship both to borrowers and lenders and the borrowers may be forced to go to unorganized sector.