In the wake of the ongoing audit at IIFL Finance’s gold loan business, the central bank is said to be reviewing regulations on gold loans. Certain norms pertaining to loan to value, cash disbursement limits, assaying of the underlying gold, and auctioning of gold are under review. A detailed circular or operative guideline covering these aspects is 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 that there could be many unwritten practices in the gold loan business which have required corrective steps at an industry level,” said a CEO of a gold loan NBFC.

While a few gold loan companies have been contacted by the regulator recently to take certain corrective operational measures, in order to ensure industry-wide compliance, it is gathered that it has become imperative for the RBI 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 another CEO of a NBFC. An email to RBI seeking comments on the matter remained unanswered till press time.

Corrective steps

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 This will entail that NBFCs tie up with banks to ensure that loan amounts can be withdrawn through bank accounts. To be sure, the Income Tax Act restricts banks from handing out more than ₹20,000 as cash disbursements, though there is no such rule as per banking regulations. According to sources, with gold loans mostly sought as an emergency product, cash disbursements have for 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 Bombay Bullion Rates.

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“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 a CEO quoted above. While a few South-based NBFCs have represented this matter to the regulator, 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 for NBFCs. “We may have to increase the interest rate on gold loans to accommodate higher compliance costs,” said a CEO of an NBFC.

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