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Saturday, January 25, 2014

Banks can now lend up to 75% of value of pledged gold

The Reserve Bank of India on Monday allowed banks to lend more against pledged gold jewellery, thereby creating a level-playing field for them vis-à-vis gold loan companies.

This move follows the central bank’s January 8 announcement that gold loan companies or non-banking finance companies (NBFCs) can lend up to 75 per cent of the value of pledged gold jewellery against the earlier 60 per cent.

In a notification, the central bank said banks can lend up to 75 per cent of the value of pledged gold jewellery, including bullet repayment of loans. Bullet repayment refers to the loan being repaid at the end of the tenure instead of in instalments.

To standardise the valuation and make it more transparent to the borrower, the RBI said gold jewellery accepted as security/collateral will have to be valued at the average of the closing price of 22 carat gold for the preceding 30 days as quoted by the India Bullion and Jewellers Association Ltd (formerly known as Bombay Bullion Association).

If the purity of gold is less than 22 carats, the bank should translate the collateral into 22 carat and value the exact weight of the collateral. In other words, jewellery of lower purity of gold shall be valued proportionately.

Unorganised sector

By allowing banks and NBFCs to lend more against the pledge of gold jewellery, the central bank may be trying to break the shackles of the unorganised sector in the business of lending against gold.

The RBI reiterated that banks should continue to observe necessary and usual safeguards and also have a suitable policy for lending against gold jewellery with the approval of their boards of directors.

In May 2013, the RBI had imposed restrictions, according to which while granting advance against the security of specially minted gold coins sold by banks, they would have to ensure that the weight of the coin(s) does not exceed 50 gm per customer and the amount of loan to any customer against gold ornaments, gold jewellery and gold coins (weighing up to 50 gm) should be within the board-approved limit.

The limit of 50 gm is also applicable to grant of advance against units of gold ETFs and gold mutual funds.

Source: Thehindubusinessline


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