Editorial

RBI’s move to hike LTV limit on gold loans when prices are high is risky

| Updated on August 09, 2020 Published on August 09, 2020

While the intent behind this move is understandable, the timing is imprudent as domestic gold prices, having climbed 40 per cent from the beginning of 2020, are ruling close to record highs and are quite susceptible to correction.

With Covid creating unprecedented financial stress, it isn’t surprising that Reserve Bank of India in its role as banking regulator has devoted significant portions of its recent policy reviews to measures aimed at easing the flow of credit to businesses and households. But one move in the latest review that runs counter to its reputation as a conservative regulator, is the hike in Loan-to-Value (LTV) norms for banks extending gold loans for non-agricultural purposes from 75 to 90 per cent, until March 2021. The RBI perhaps reckons that higher LTV norms can help low-income households and small businesses raise quick liquidity to tide over the crisis while aiding the monetisation of idle gold holdings. While the intent behind this move is understandable, the timing is imprudent as domestic gold prices, having climbed 40 per cent from the beginning of 2020, are ruling close to record highs and are quite susceptible to correction.

Historically, the RBI has taken quite a jaundiced view of Indian lenders chasing growth in their gold loan portfolios during periods of crisis. Not only is gold a volatile asset class where global price swings are hard to foresee, cartage issues besieging most of the gold jewellery holdings in India make it a dicey proposition for lenders to judge the actual value of the collateral against which they’re extending gold loans. As many retail borrowers use gold loans as a last resort, demand for such loans typically gallops during economic strife. With the borrower already stretched thin while taking the loan, she’s seldom in a position to meet margin calls from the lender to top up her collateral or to settle the loan when gold prices correct. During the balance of payments crisis of 2013, gold loan NBFCs landed in hot water after a sudden about-turn in gold prices that exposed them to the double-whammy of rising defaults and unviable LTVs, obliging the RBI to step in with tighter LTV norms of 60 per cent (against the then prevailing 75 per cent). Yes, having extended more liberal LTV norms only to banks and not NBFCs this time around, the RBI perhaps reckons that banks with their diversified loan portfolios and far better access to funds may better manage these risks. But with sizeable swathes of their retail loan books already under moratorium, business borrowers seeking accommodation and a loan restructuring scheme in the works, it is a moot point if Indian banks have the appetite for pro-cyclical lending against gold at this juncture.

To monetise idle gold and provide easier liquidity to households against it, the RBI and the Centre should consider other policy fixes suggested by expert committees in the past, such as launching a specialised Bullion Bank that can offer two-way quotes on gold, setting up more hallmarking and assaying centres across the country to provide better value to jewellery sellers, addressing quality issues in the jewellery industry and revamping the gold monetisation scheme it had launched in 2015 which has proved quite unsuccessful so far.

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Published on August 09, 2020
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