With the ever growing demand of loan for Cars, Houses, Tourism, Higher education, et cetera the Bank, Non-Banking entities and the Gold industry had come up with the old idea of lending funds against collateral of gold jewelry in a more refined manner than in our grandparent’s era. It proved convenient for many Indians with Gold in their legacy to keep the gold as collateral with trusted organization and use the money in tight situations. The structure seems flawless, but as the beautiful moon has a dark spot, so does these Gold loans. However, the Reserve Bank of India has taken care not to let this blessing turn into a curse.
Recently, it was observed that NBFCs (Non- Banking Financial Companies) that are predominant in the Indian markets follow a business model which has inherent concentration risk and is exposed to adverse movement of gold prices. Due to this, they are requested to maintain a Loan-to-Value (LTV) ration not exceeding 60% for loans granted against the collateral of Gold jewelry and disclose the percentage of such loans to their total assets in their balance sheets.
The NBFCs, targeting Gold market, with 50% or more of their financial assets in gold will have to maintain 12 % capital of Tier 1 by April1, 2014. The NBFCs are also barred by RBI against granting any advance against bullion, primary gold and even gold coins along with jewelry.
For such measures, RBI explains, the major NBFCs have recorded significant growth in terms of both sizes of their balance sheet and physical presence in the recent years. This has led to their increased dependence on public funds including bank finance and non-convertible debentures issued to retail investors.
So, on March 21st, the Country’s Central Bank issued the notification reducing the scope of lending funds against collateral of bullion and gold jewelry by NBFCs as RBI was alarmed by the rapid pace of their business growth. This decision is welcomed by the major NBFCs explaining that the measure is taken to regulate the risk for the new entrants in the sector and also to facilitate the existing companies in the long run so that the industry has a robust capital structure to address any possible fall in gold prices.