Advances made by banks to gold loan companies could be a “cause of concern,” in case the business model of these companies falter, Reserve Bank of India said in a Financial Stability Report released today.

Gold loan companies borrow from banks at a lower rate and lend to the public at a higher rate, pocketing the difference. These companies take gold as collateral from the people they lend to.

RBI data show that the total asset size of these gold loan companies has soared over eight times from March 2009 to March 2012. As on March 31, 2012, the total asset size for these companies was $445.1 billion ($54.8 billion as on March 31, 2009).

Individual borrowings account for about 95 per cent of the total gold loans borrowed.

RBI expressed concern that the growth in gold loans is concentrated mainly in the hands of two companies. The central bank, however, did not name them.

The report mentioned that since the loans are collateralised only by gold, any sharp decrease in its price would add to the risk. Also, since gold loan companies promise quick disbursal of loans, know-your-customer and due diligence norms risk being compromised.

RBI REMEDY

RBI de-recognised the priority sector lending status to banks, which lend to non-banking financial companies which in turn lend against gold jewellery.

Of the total lending, 40 per cent should be toward priority sector, RBI guidelines mandate.

The central bank has also directed the gold loan companies to maintain a minimum loan-to-value (LTV) ratio of 60 per cent for loans granted against gold. It has also asked these companies to maintain a minimum Tier-I capital of 12 per cent by April 1, 2014.

Related Topics