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.

(This article was published on March 22, 2012)
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