IIFL Finance fallout: RBI relooking gold loan norms

IIFL Finance fallout: RBI relooking gold loan norms

In the wake of the ongoing audit at IIFL Finance’s gold loan business, the Reserve Bank of India is said to be reviewing regulations on gold loans.

Certain norms pertaining to loan-to-value, cash disbursement limit, assaying of the underlying gold, and auctioning of the precious metal are under review. A detailed circular, or an operative guidelines, covering these aspects can be expected soon.

According to highly placed sources aware of the matter, “The ban on IIFL Finance’s gold loan business has brought to the fore the possibility of many unwritten practices in the segment requiring corrective steps at an industry level,” said the CEO of a gold loan NBFC.

While a few gold loan companies were contacted by the RBI recently to take certain corrective operational measures, to ensure industry-wide compliance, it is gathered that it has become imperative for the central bank to issue specific guidelines on the same. “The new circular will address some of the operational
issues so far pointed out as concerns or loopholes in practices by the regulator,” said the CEO of another
NBFC. An email to the RBI seeking comments on the matter remained unanswered till press time.


The RBI expects that no lender (bank or non-bank) extends cash disbursements on gold loans. This will entail that NBFCs tie up with banks to ensure that loan amounts can be withdrawn through bank accounts. While the Income Tax Act restricts banks from handing out more than 20,000 in cash, there is no such rule in banking regulations. According to sources, with gold loans mostly sought as an emergency product, cash disbursement has long been the industry practice.

Secondly, there is a discrepancy in the manner of valuing gold, which in turn can have an implication on loan-to value assessments. To put things in perspective, there is a significant difference in the pricing of gold between North and South India, and the RBI prefers that stocks of gold be valued based on the
monthly average of the Bombay Bullion Rate (BBR).

“BBR invariably is very different from daily local rates across States, and trying to unify rates may not result in a fair assessment of loans,” said the CEO quoted above. While a few South-based NBFCs have represented this matter to the RBI, sources say the valuation of the underlying asset remains a thorny issue.

Likewise, many NBFCs follow the district approach for auctioning gold. “The regulator wants lenders to follow a more centralised auctioning process,” said a senior executive of a gold loan company.

Here, again, gold loan companies are said to have explained to the RBI that a centralised auctioning process could increase the cost of doing business. “We may have to increase the interest rate on gold loans to meet the higher compliance costs,” said the CEO of an NBFC.


Courtesy: Business Lines – Dated 15 May 2024
Image credits: Gold Investment Png vectors by Lovepik.com

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