Upcoming Gold Loan Regulations: Key Proposals from RBI’s Draft
The Reserve Bank of India (RBI) has unveiled draft guidelines aimed at standardizing the gold loan issuance process for banks and non-banking financial companies (NBFCs). These new proposals are designed to enhance transparency and uniformity in gold loan practices, ultimately benefiting borrowers. By establishing clear regulations for loans secured by gold jewelry and ornaments, the RBI seeks to provide clarity on loan conditions, regardless of whether borrowers choose banks or NBFCs.
Key Changes in Gold Loan Regulations
The RBI’s draft guidelines introduce several significant changes to the gold loan landscape. One of the most notable adjustments is the cap on the loan-to-value (LTV) ratio, which is set at 75% for all gold loans. This marks a departure from the temporary increase to 80% that was implemented during the Covid-19 pandemic. Sanjiv Bajaj, Joint Chairman and Managing Director of Bajaj Capital, explained that while banks may have the flexibility to set higher LTV ratios for income-generating loans, the overall LTV restriction remains unchanged. This consistency is expected to provide borrowers with a clearer understanding of their borrowing limits.
Additionally, the guidelines require borrowers to provide proof of ownership for the gold being pledged. If purchase receipts are unavailable, a declaration must be submitted. Lenders are prohibited from extending loans if there is any doubt regarding the ownership of the collateral. This measure aims to protect both lenders and borrowers by ensuring that all collateral is legitimate and verifiable.
Transparency and Valuation Procedures
To further enhance transparency, lenders will be mandated to issue a certificate detailing the purity, weight, deductions, and value of the pledged gold. This certificate will serve as a crucial document for borrowers, ensuring they are fully informed about the terms of their loan. Bajaj emphasized that this initiative is designed to clarify how lenders assess the gold’s value and ensure that the assessment is acceptable to borrowers.
Moreover, the guidelines specify that loans will only be permitted against gold jewelry, ornaments, and bank-sold coins with a minimum purity of 22 carats. This restriction aims to standardize the types of gold that can be used as collateral, thereby reducing ambiguity in the lending process. Interestingly, the draft also allows loans against silver jewelry and ornaments, provided they meet a minimum purity requirement of 925.
Loan Limits and Documentation Requirements
The RBI’s draft guidelines propose specific limits on the amount of gold that can be pledged as collateral. Each borrower will be allowed to secure loans against a maximum of 1 kilogram of gold ornaments and 50 grams of gold coins. This measure is intended to define the maximum exposure limit for financial institutions, ensuring responsible lending practices.
In addition to these limits, the guidelines mandate that loan agreements must include comprehensive details about the collateral, auction procedures, notice periods, repayment timelines, and any charges applicable to borrowers. This thorough documentation is aimed at fostering transparency and accountability in the lending process.
Furthermore, the guidelines stipulate that gold collateral must be returned to borrowers within seven working days after full repayment. In the event of a delay, lenders will be liable to pay a penalty of ₹5,000 for each day the return is delayed. This provision is designed to protect borrowers’ interests and ensure timely access to their pledged assets.
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