Amber light on gold

It is becoming increasingly difficult to follow the twists and turns of the Reserve Bank of India’s (RBI’s) policy framework on bank lending against gold. The latest RBI’s ‘clarification’ says that while banks can extend loans to individual customers against gold coins, up to a maximum of 50 gm, they are barred from extending loans against gold bars and exchange traded funds.

Evidently, the RBI believes that investments in gold, like shares, real estate or other capital market exposures, are subject to sharp swings in prices and may expose the banks’ loan bookto risk. Also, there is the fear that the liquidity released through lending against gold encourages speculation and hoarding in the metal. That said, it isn’t clear why coins are acceptable as long as the 50 gm limit is not breached or why bars of similar grammage don’t qualify. When it comes to systemic risk, lending against hallmarked coins is a far safer option for financial institutions than lending against jewellery. In the latter, the asset’s value can never be accurately judged on account of caratage, weight and purity issues. In fact, the 20 per cent correction in global gold prices this year has brought into focus precisely this flaw in the business model of gold loan NBFCs. They have reported significant erosion in their loan book and escalation in bad loans because the scrap value of the jewellery sold in distress was well below the value reported in their books. Last year, the RBI had taken several proactive measures to reduce such risks by restricting the NBFCs’ access to bank funds, raising their capital requirements and limiting their loan-to-value ratios to 60 per cent. Then, faced with criticism on coming down too hard on this business, it also appointed a committee to look into gold lending and its implications for the economy. This Working Group, which submitted its final report in February, flagged weak areas in the disclosure and documentation practices of NBFCs offering gold loans. But it also argued against curbs on individual gold loans and noted that NBFCs performed the socially useful role of monetising idle gold. Any excessive curbs on organised players would only push retail investors into the hands of pawn brokers and other unregulated entities.

Seen against this backdrop, it is time the RBI reviewed its policy of placing curbs on gold lending and focussed instead on monitoring lenders more effectively to ensure that they adhere to norms on Know-Your-Customer besides following prudential lending norms. A comprehensive review of all regulations at one go, as the working group has suggested, instead of piecemeal announcements as now, may also ensure greater certainty for players operating in this business.

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