The unabated growth in Gold Loans by NFBCs, had caught the attention of the regulator, I.e Reserve Bank of India.
To minimize any possible failure of the NFBCs and the possible implications on the economy at large, Reserve Bank of India, today has issued a notification to lessen the collateral damage.
The RBI notification no is RBI/2011-12/467, DNBS.CC.PD.No.265/03.10.01/2011-12 dt.21/03/2012,addressed to all NBFCs
The highlights of the Notification are : –
1) NBFCs hereafter have to maintain a Loan-to-Value(LTV) ratio not exceeding 60 percent for loans granted against the collateral of gold jewellery. This means the Loan Outstanding should not exceed 60% of the pledged gold.
2) NBFCs to disclose in their balance sheet the percentage of such loans to their total assets.
NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50 percent or more of their financial assets) shall maintain a minimum Tier l capital of 12 percent by April 01, 2014.
4) NBFCs should not grant any advance against bullion / primary gold and gold coins.
In the long run, the above measures will ensure that there are no shocks to the Indian economy, by concentration risk of Gold Loans.
The above rules are applicable with immediate effect, hence the respective NBFCs will go back to the drawing boards, to chart new strategies.
The major challenge would be in convincing the existing borrowers to bring in additional money, to maintain the LTV.