RBI's new gold loan rules

Industry Insights
1

Saw updates about RBI changes to how gold loans work. Seems like lenders will now need to ensure the total loan, including interest stays within 75% of the gold’s value at all times. That might mean smaller loan amounts, especially for bullet loans where repayment happens at the end.

Also, it looks like interest has to be cleared before renewing a loan, and lenders have to be sure the gold belongs to the borrower, so there is no re-pledging.

I didn’t fully get “monitoring end use of funds.” Does this mean Muthoot will now start asking what you’re using the loan for?

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This reminds of something i have come across, particularly with respect to how the Agri jewel loans get used, for purposes other than agriculture.

The government normally subsides (through interest subvention) small ticket agri jewel loans, say ≤₹3lac, that meet certain criteria, like owning a cultivatable land etc.

If a typical jewel loan interest is say ≥ 9%, the subsidized agri jewel loan could be around ≤7%.

In the non-genuine cases, these borrowings typically end up getting deposited in to FDs, to take advantage of this subsidy, by earning a neat spread of 2% or more (i.e., borrow at 7%, deposit into FDs at 9%, make a 2% gain on borrowed funds).

Such borrowings could also be used for informal lending or for personal use too (i.e., anything other than agriculture related)

So when end use is different, the purpose of the loan & subsidy gets defeated. But not sure how they can monitor the end use in all cases. IMO most non-agri jewel loans are for personal use.

3

@SG_13 If the rules get too strict, could this end up pushing more borrowers towards informal lending?

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No clarity on how to implement continous monitoring. Might be a procedural activity of banks where a periodic call may be made to the customer. And take customers word for it

Lets see the final guidelines next month if they clarify this part.

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5

Don’t think so. Jewel/gold loans carry the lowest interest rates, mainly because they are secured and liquid.

In informal lending (pawn shops), they charge higher interest for a even lower LTV than banks/NBFC, so no rational person would go there.

Don’t think genuine borrowers would have anything to worry, but yeah, now the amount that they can borrow reduces from 80%(or whatever) to 75% of LTV.

Now that gold rates, seem to have peaked, i believe lower LTV is a safe bet, as it is very much possible for gold rates to come down.

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Informal lending at rural will be difficult. Usually people wants to pawn in a easy way. Time of borrowing rational thinking is less.

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This is a good rule, to ensure that if the gold price falls there will not be a need to sell the gold and settle. Right now the price of gold is on the high and for some reason it falls there will be a issue.

This is to curtail additional lending based on the increase in market price of gold, something like Subprime loans where bank continued to increase the loan amount to customer based on the market value of the property and when it crashed it led to foreclosure.

This is standard clause, this is applicable for even OD against FD where the OD form has clauses saying will not use for agriculture/plantation, nidhi chit fund etc.

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