GOLD NEWS

RBI restricts bank loans for gold

India's apex bank is concerned over banks' exposure to gold finance companies and has curbed lending for the precious metal in every form.

MUMBAI (Mineweb) - 

Coming down heavily against gold once again, India's apex bank the Reserve Bank of India (RBI) has asked banks not to finance the purchase of gold. Though the RBI has already halted banks' ability to lend money for the purpose of purchasing gold bars, now the apex bank has slashed lending for gold in any form.

"No advances should be granted by banks against gold bullion to dealers/traders in gold if, in their assessment, such advances are likely to be utilised for purposes of financing gold purchase at auctions and/or speculative holding of stocks and bullion," the bank says in its second quarter review of the monetary policy 2012-13 on October 30.

It adds, "In this context, the significant rise in imports of gold in recent years is a cause for concern as direct bank financing for purchase of gold in any form viz., bullion/primary gold/jewellery/gold coin could lead to fuelling of demand for gold for speculative purposes.

Commercial banks have millions worth of exposure to gold loan companies. But now, other than for working capital finance, banks have been restrained from financing the purchase of gold for any reason. The central bank has said that it would be issuing detailed guidelines in this regard separately.

India's huge pool of household gold and a tough economic environment have pushed consumers to opt for gold loans. While many banks and non banking finance companies have competed with each other to bring new products to the market, it is the gold loan portfolio in the country that has grown by leaps and bounds.

As M Sampat, retail banking at Federal Bank said, "With gold loans, there is almost no delinquency, the risk for such loans is much less."

The bank, which was earlier planning to increase its gold loan exposure to 15% from the current 11% of the overall portfolio, has now been stopped in its tracks.

An official of another public sector bank said that many banks finance purchasing of gold jewellery or gold bars. Leading jewellers also have a tie-up with banks to offer loans to customers who wish to buy jewellery from their shops. "All such financing cannot be allowed from now on," said a Punjab and Maharashtra bank official.

To rein in the unbridled growth of gold loans in India, the RBI had also directed non banking finance companies to restrict the loan size to 60% of the value of gold jewellery. Earlier, they were offering around 90-100% of the value.

These measures are bound to add to the long list of defensive measures that the authorities have already taken. Though the RBI is clamping down on gold to control the current account deficit and restrain the spread of black money in the system, it is consumers that have lost out on another way to access cheap loans.