Gold Lenders Lose Sheen Over New RBI Regulations

The Reserve Bank of India continues with its stance against the yellow metal. In a recent development, followed by the recommendation of an internal panel, the apex bank has further tightened rules for finance companies which lend against gold, a fast-growing business in the country.

In a notification issued on Monday, September 16, 2013, the central bank said, "Currently, there is no standard method for arriving at the value of gold accepted as collateral and valuation is arbitrary and opaque". It has laid down that to arrive at the loan-to-value ratio, lenders need to value the pledged gold at the average closing price of 22 carat gold for the preceding 30 days (as quoted by the Bombay Bullion Association). The ratio for loans against jewellery would remain at 60%.

The regulator also streamlined the process by which lenders auction gold when a borrower defaults, saying that lenders need to declare a reserve price for the pledged ornaments. They would also need RBI approval to open branches exceeding 1,000. No new branches would be allowed without adequate storage facility for gold. Muthoot Finance has 3,801 branches and Manappuram Finance has 3,293, according to their websites.

The other important provisions mentioned by the RBI are:

• NBFCs financing against gold as collateral must insist on a copy of the PAN card of the borrower for all transactions above Rs 5 lakh.
• High value loans of Rs 1 lakh and above must only be disbursed by cheque.
• Documentation across all branches must be standardised.
• NBFCs shall not issue misleading advertisements (like claiming the availability of loans in a matter of 2-3 minutes).

Following the RBI's notification, the stock prices of gold loan providers slumped on the bourses. Muthoot Finance fell 6.4% and Manappuram Finance is trading down by 4% at Rs 15.60.