The RBI, by clamping down on NBFC advances against gold, has done little to encourage the circulation and monetisation of idle gold hoards.
The Reserve Bank of India's (RBI) directive to non-banking financial companies (NBFCs) in the gold loan business not to extend advances exceeding 60 per cent of the value of the jewellery pledged with them smacks of unnecessary micro-regulation. Unlike banks, the NBFCs who lend against the collateral of gold jewellery do not accept public deposits. Even if some of them have raised funds through non-convertible debentures, these cannot be equated with ordinary deposits that are protected by strict prudential requirements and supervision norms. The gold loans are also usually of small ticket sizes made for periods of six months to a year. That – apart from the inherent value of the collateral itself – makes them less risky vis-à-vis lending to power projects or even home loans of 15-20 years' tenure. Moreover, it is not clear how exactly the RBI has arrived at 60 per cent loan-to-value ratio as a safe outer limit for NBFCs, even while not mandating it in respect of gold advances by commercial banks. This, despite the likes of Muthoot and Manappuram Finance having far less proportion of bad loans on their books compared with regular banks.
All this is not to argue against the need to maintain restraints or evolve appropriate prudential norms in lending against gold. But that is something for the companies themselves to decide, as they are certainly better placed than the RBI to figure out the optimal loan-to-value ratios for individual customers. True, the gold loan portfolios of leading NBFCs have grown astronomically in recently years, facilitated, in turn, through bank borrowings and proceeds from non-convertible debenture issues. That cannot by itself, however, be reason for micro-managing their business – which is what fixing a blanket loan-to-value ratio amounts to. If anything, it kills competition by not allowing new organised players in the business or, worse, forcing borrowers to go back to pawnbrokers and others willing to lend out a large share of the pledged gold value. The regulatory authority of the RBI should be invoked only to curb bad lending practices inimical to borrower interests.
The other reason for caution against knee-jerk restrictions on the gold loan business is more macro. Currently, the stocks of privately-held gold with Indians are estimated at around 18,000 tonnes, much of it – worth over $ 900 billion at today's prices – representing physical savings locked away in the safes and vaults of millions of homes. With not even a tenth of this gold being monetised – the biggest lender, Muthoot Finance, has collateral holdings of just over 130 tonnes – there is a huge market potential to harness these idle assets for productive use. It is one thing to discourage imports of gold that drain away precious foreign exchange from the country. But circulation and monetisation of the idle gold hoards within the country is a process that ought to be encouraged. The RBI's latest actions hardly help in that direction.
Keywords: The RBI, clamping down, NBFC advances, against gold, circulation, monetisation, idle gold hoards
Comments:
Well. The gold held in the vaults of NBFCs belong to individuals who
pledge out of necessity or as a safe vault. Anyway the gold held with
individuals do not help the country's finances. Look at the tons of
gold held by trusts, temples and mutts. It came out in print media
that the a mutt in puri had silver boulders gathering dirt and moss
uncared and unattended for long time, perhaps not taken into account
at all. The tons of gold held in thirumala, palani, tiruchendur,
sankara mutts etc., must be immediately tranfered to RBI. These
institutions do not make everyday use of the bullion and their values
do not change everyday by the quantum of gold held. The institutions
can get a 0.1% of interest on the minimal value of the metal over a
financial year. Such an act legislated by parliament does not affect
them since there is a continuous flow of gold. There should be a 30%
taxation on the income by cash to temples to improve our finances.
@adithyan :
If we allow legislation to take away the wealth of temples, the question that can be asked is why only temples? Can't it be extended to all religious organisations? Then again why only religious organisations why not rich individuals? We keep hearing some news saying some industrialist presenting a diamond ring to his wife or another one buying an antique sword and so on. What does a diamond ring or sword do in the vault? The same argument can be extended to all individuals - irrespective of how wealthy they are, because gold sitting idle in lockers is waste!
The entire argument is flawed, because the moment gold/silver from temples (or individuals) is transferred to the Govt., it spends it off on most uneconomic projects for political reasons and in no time the Govt. treasury becomes empty. Back to square one!
True, the regulator must not seek to micromanage the business of the NBFCs. However, one must not forget that these NBFC s are also exploiting the borrowers, following unethical practices and usurping the wealth of the poor. It's high time some sort of regulation was imposed. Please checkout on some of these NBFC s and also interact with some of their borrowers - the findings will be shocking to you. (suggest you should come out with a exclusive on this) The free hand given to these companies to open offices across the country with lesser regulation than applicable to a tea shop has in a way indirectly contributed to the astronomical rise in the price of gold and encouraged borrowing for un-productive purposes
NBFCs have a role. RBI has a role . They have come out with new stipulations of 60% . No NBFCs have made a complaint on this regulation, instead they have conveyed that they can run with the new conditions profitably and that their margins not affected.No public who want to pledge their gold (for their urgent needs) with the NBFCs have made any remark that the loan amount they get is not adquate.We have to appreciate the organised growth of the NBFCs all over India under the control of RBI as a good development. This is a new window for goldloan seekers, small or big, for their urgent cash requirements.If the public have any problems with these NBFCs, nothing has cometo light so far.What the RBI has done under sheer prudential norms.Incase RBI is not doing anything then they will be taken to task.The present action indicate that RBI is monitoring . Lets be happy on that.The reference to gold in temples,etc . is unwarranted in the present context.
Yes true,all the pawn brokers should be brought to regulated lending practice and they have to be governed properly, as the public jewellery have been pledged for loan and if the trade is not regulated properly, then there will be too much of cheating and usurious rate of interest will be charged.
It is good RBI imposed the restriction of 60% to Loan To Value in sanction of Gold Loans by NBFCs. The razor thin margin between value of gold to loan granted by NBFCs particularly by Muthoot and Munnappuram and exploitation of public with abnormal rate of interst reminds nothing short of pawn brokers.
The maximum ceiling of 60% loan to value of the gold enables some discipline and public will get better relief when rates of interest is also regularized by RBI along with quantum of loan with discretion of 1% to instill competitive spirit among NBFCs.
@adithyan: Article 27 of the Constitution of India prohibits any sort of
taxation on any religious activity. However, I agree with you, this
article needs to be repealed and religious income taxed. Many temples,
mosques and churches in India have amassed huge amounts of wealth
without paying any taxes to society. It is time that we bring them under
the tax net for the benefit of the common people.
@Mithun the temples of india are under control by devaswom and the income is taken by govt but what abt the mosques and churches they do not pay anthing to the govt and they are opening thier branches as much as they want. Nbfc is ruled by govt but only when they are under surviellance. otherwise the 60% will be increased.
As per RBI regulations no gold loan against gold bullians, bars when it will be open for the same as before for the gold bars?
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