Gold Loan Rule Changed: The Reserve Bank of India (RBI) has identified some important facts in the system of giving gold loans, after which major changes have taken place in this sector. According to a Times of India report, lenders are now moving from traditional bullet repayment options to EMIs and term loans to avoid regulatory issues.
RBI found irregularities in giving gold loan
On September 30, RBI has informed about irregularities in giving loans against gold ornaments and jewellery. These included gaps in loan sourcing, appraisal processes, monitoring of end-use funds, auction transparency and compliance with loan-to-value (LTV) ratio norms.
The report said that the Central Bank has also criticized the practice of partial payments and loan rollover, besides warning of possible mistakes. A senior banking official said, it is clear from the RBI order that it wants lenders to thoroughly examine the repayment capabilities of the borrower and not depend only on the collateral (asset).
What is the current gold loan model?
At present, gold loans are mainly made following the bullet repayment model. Here the borrower pays the entire principal and interest at the end of the loan. Alternatively partial payment during the tenure is accepted. However, to reduce the risk, RBI is emphasizing on immediate EMI-based repayment options.
The gold loan sector has seen tremendous growth recently, driven by the rising price of gold and limited access to unsecured credit. According to CRISIL, between April and August this year, retail loans issued by banks against gold increased by 37 percent. According to the report, the NBFC focused on gold loans has increased its assets under management by 11 percent in the first quarter of the financial year 2024-25.
According to TOI, Prakash Aggarwal, partner, Gefion Capital, has alerted that a possible correction in gold prices is not a good thing, as falling collateral value may lead to challenges like refinance and if this happens, repayment capacity will be under pressure.
It has also been said in the report that till September 30, the loans given by banks against the pledge of gold reached Rs 1.4 lakh crore, which shows an increase of 51 percent on an annual basis. Scientists believe that if RBI tightens the rules, this growth may stop or slow down as lenders remain cautious about staying away from excess risk.
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