The Reserve Bank of India (RBI) has come out with draft directions on strengthening gold loan norms for banks and financial institutions.

Under the proposed rules, lending against primary gold, silver or financial assets backed by primary gold and silver like units of exchange-traded funds (ETFs) or units of mutual fund is restricted due to broader macro-prudential concerns and speculative and non-productive nature of the metal.

Lenders will not be allowed to extend loans where ownership of the collateral is doubtful, according to the draft rules.

Banks and financial institutions will need to “keep a record of the verification of the ownership of the collateral” and in case the original receipts of purchase of gold collateral are not available, a suitable document or declaration obtained from borrower will be prepared explaining how the ownership of the collateral has been determined.

“Pledge of gold collateral shall be subject to suspicious transaction reporting policy of the lender under relevant regulatory directions,” the draft guidelines said.

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“Same eligible gold collateral shall not be used concurrently for extending loans for income generating purposes as well as consumption loans, notwithstanding the value of the collateral. This requirement, however, shall be without prejudice to the banker’s general rights of lien,” the RBI said.

Lenders will need to put in place proper systems and controls to ensure that end-use of these loans are periodically monitored and relevant evidence are put on record, the draft guidelines said.

Documentary evidence of end-use will be mandatory for loans

Documentary evidence of end-use will be mandatory for all income-generating loans, and for consumption loans above a threshold amount decided by the lender’s policy.

Banks and financial institutions will also have to put in place ceiling on quantum of loan to a single borrower against eligible gold collateral according to the purpose of the loan – income generating or consumption, which shall be applied in a consistent and non-discriminatory manner.

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Regulatory objectives of these regulations

The regulatory objectives behind these revised directions are to put in place a harmonised regulatory framework for such loans applicable across various banks and financial institutions, address the concerns observed relating to some of the lending practices being followed, provide necessary clarity on certain aspects and strengthen the conduct-related aspects.