In a blow to non-banking finance companies in gold loan business, the Reserve Bank of India has directed them not to give loans exceeding 60 per cent of the value of the gold jewellery pledged with them.

NBFCs primarily engaged in lending against gold jewellery have been asked not to grant any advance against bullion/primary gold and gold coins.

Further, they have to disclose in their balance-sheet the percentage of loans against gold jewellery to their total assets.

Some NBFCs are known to give up to 80 per cent of the value of gold as loans. By limiting the loan-to-value ratio to 60 per cent and disallowing pledging of bullion / primary gold and gold coins, borrowing from gold loan companies could lose sheen, say analysts.

Mr Thomas George Muthoot of Muthoot Fincorp feared that the latest move could have the effect of setting back the industry by years together. People who depended on the product may move back to the unorganised sector, he added.

The RBI has issued the directive as NBFCs lending against the security of gold jewellery have seen rapid business growth. This, in turn, has led to their increased dependence on public funds, including bank finance and non-convertible debentures issued to retail investors. The RBI observed that the nature of their business model has inherent concentration risk and is exposed to adverse movement of gold prices.

NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50 per cent or more of their financial assets) will be required to maintain a minimum Tier-l capital of 12 per cent by April 1, 2014, the RBI said.

(This article was published on March 21, 2012)
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