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RBI’s gold loan norms UPSC NOTE

 RBI's Directive to Gold Loan Lenders:

  • The Reserve Bank of India (RBI) issued a directive to gold loan lenders to adhere strictly to regulatory norms.

  • This move aims to tighten control over Non-Banking Financial Companies (NBFCs).

  • Increased scrutiny followed findings of regulatory violations by certain NBFCs.

  • In March, RBI banned IIFL Finance from issuing new gold loans due to regulatory breaches.

RBI’s Gold Loan Norms

  • Loan-to-Value (LTV) Ratio:

  • Lenders cannot loan more than 75% of the gold's value submitted as collateral.

  • This is to provide a cushion to absorb potential losses from borrower defaults.

  • Cash Disbursement Limits:

  • Compliance with income tax rules mandates that no more than ₹20,000 of the loan can be disbursed in cash.

  • The remainder of the loan must be deposited into the borrower’s bank account.

  • Auction Process:

  • Auctions of gold (in case of borrower default) must be conducted fairly and transparently.

  • Auction locations must be accessible to borrowers.

  • Future Guidelines:

  • The RBI is believed to be developing detailed guidelines for gold loans.

Reason for Reinforcing Norms

  • Regulatory Violations:

  • Some NBFCs have been found violating gold loan regulations.

  • IIFL Finance was penalized for various infractions, including improper loan size and disbursal methods, inaccurate gold valuation, and irregular auction processes.

  • Aggressive Lending Practices:

  • NBFCs might overvalue gold to offer larger loans, aiming to rapidly expand their loan books.

  • This aggressive growth raises concerns about systemic risks as the gold loan industry expands.

  • Internal vs. External Assayers:

  • NBFCs use internal assayers to evaluate gold, unlike banks that use external assayers.

  • This practice raises concerns about the accuracy and reliability of gold valuations.

  • Rapid Growth of Gold Loan Portfolios:

  • NBFC gold loan portfolios have grown significantly since the pandemic, from ₹35,000 crore in FY 2020 to ₹1,31,000 crore in FY 2023.

  • The RBI is wary of the potential systemic risks from such rapid growth in gold loans.

Impact on NBFCs

  • Growth and Profitability:

  • Increased scrutiny and adherence to norms might hinder the growth and profitability of NBFCs.

  • Cash disbursement limits (max ₹20,000) could make NBFC gold loans less attractive.

  • Emergency Cash Services:

  • NBFCs pride themselves on providing quick emergency cash, especially to those outside the banking system.

  • Stricter enforcement of loan-to-value rules might reduce their ability to lend aggressively.

  • Temporary Pandemic Measures:

  • During the pandemic, RBI temporarily allowed loans up to 90% of the gold's value.

  • This measure enabled NBFCs to expand their loan books rapidly.

  • Increased Business Costs:

  • Transparent and accessible auction processes could increase operational costs for NBFCs.

  • This might lead to higher borrowing rates for lenders.

  • Sustainability and Systemic Risk:

  • The RBI believes that stricter lending norms will ensure the long-term sustainability of the gold loan business.

  • These measures aim to mitigate potential systemic risks as the industry grows.



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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: RBI’s gold loan norms UPSC NOTE
RBI’s gold loan norms UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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