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The Finance Ministry has asked all public sector banks (PSBs) to come up with a policy for lending against the security of gold.
This move comes in the wake of the RBI tightening the noose around gold loan companies.
The Ministry, in a communication, said banks should put in place a policy for using gold as a security for giving term loans and overdraft accounts ‘quickly' if this has not been done so far. Further, separate targets should be fixed for all the branches for lending against gold.
According to bankers, the Ministry may be wanting banks to fill the demand-supply gap that may arise on account of loans from non-banking finance companies (predominantly engaged in lending against the collateral of gold jewellery) turning unattractive due to RBI's directives.
In late March, the RBI said NBFCs cannot exceed a loan-to-value ratio (the amount of loan they can give relative to the value of the security) of 60 per cent for loans granted against the collateral of gold jewellery.
It also directed them not to grant any advance against bullion/primary gold and gold coins.
Prior to the RBI circular, NBFCs routinely gave loans up to 80 per cent of the value of the pledged gold jewellery. Pure play gold loan companies include Manappuram Finance and Muthoot Finance.
While South-based PSBs such as Indian Bank, Indian Overseas Bank and Andhra Bank actively lend against gold, their counterparts in the northern, western and eastern regions of the country are not so active.
In the South, there is no inhibition in pledging gold to take loan.
However, in other parts of the country this practise is eschewed. The Ministry may be encouraging PSBs to popularise the loan against gold product so that the yellow metal turns into a productive asset.
High rates
While NBFCs have a quick turnaround (some even promise a loan in five minutes) for gold loans, they charge high interest rates — 20-24 per cent. Though banks may take a day or two in processing gold loans, they charge lower interest — 13-15 per cent.
According to various estimates, the gold loan portfolio in the country is around Rs 1,00,000 crore, divided almost equally between NBFCs and banks.
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