12.18 There were strong pleas made by the Association of Gold Loan Companies (AGLOC) that they deserve a level playing field with the banks providing gold jewellery loans in terms of extant regulations governing their functioning. The rationale behind the differential regulatory treatment for banks and NBFCs lies in difference between the overall business models followed by these two types of entities. Banks have better corporate governance practices and follow stricter accounting and disclosure norms than NBFCs.
Gold is an internationally traded commodity and the domestic prices are determined by international prices adjusted for transportation costs, customs duty and the exchange rate. The Working Group examined whether consistent rise in gold imports has led to deterioration in the balance of payments position and resulted in external sector vulnerability in India. Demand for gold appears to be autonomous and a function of several influences and factors in India and may not be strictly amenable to policy changes. Supply of gold, through organised channels can be constricted, but buyers may take recourse to unauthorised channels to buy gold. In this context encouraging gold jewellery loans from Banks and NBFCs, ensuring customer protection of borrowers and changes in the practices of NBFCs is desirable.
- The SIP offers a convenient way to diversify investment portfolio and reap the returns of gold from a long-term perspective.
- 6.13 NBFCs lending against gold, source their funds from the banks as well as from other non-banks sources.
- 13.53 It needs to be noted that even when there is a fall in the gold prices, the loss to be booked depends on the value of jewels that may have to be auctioned and not on the value of entire collateral the gold loans NBFCs hold.
- It was also reported that, so far, all theft cases reported were done in connivance with an insider by the staff and therefore, these cases were resolved.
Thus, if this gold is supplied at a base rate linked rate, it would lead to overpricing of MGLs. However, the implication of such an overpricing would be a reduction in the demand for MGLs from the banking sector in the medium to long-term. Second, such overpricing of MGL may lead to higher margins for the banking sector from MGL segment. Thus, banks stand benefitted in the short-term as compared with the beneficiaries.
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Alternatively, Reserve Bank can also consider imposing a cap on the interest rates to be charged on gold loans by the NBFCs. 13.12 The Working Group is of the view that banking sector, as a formal channel, has been playing an important role in the gold imports and gold supply catering to the huge demand for gold. Their discontinuation from this role may not materially alter the demand for gold, but, may possibly give rise to the participation of unauthorsied channels entering the gold supply chain as the demand for gold will not come down.
The NBFCs are required to put up the FPC so adopted on their web-site, if any, for information of various stakeholders. The Fair Practices Code so framed and approved by the Board of Directors should be published and disseminated on the web-site of the company, if any, for information of the public. 11.15 The format and content of documentation followed by each NBFC appear to be different, although each one of them claims to be giving a pawn ticket and loan agreement copy to the borrower. On a perusal of the copies of documents shown to the Working Group by complaining borrowers, it was evident that the documentation formats and contents in the pawn ticket differs from NBFC to NBFC and also from branch to branch of the same NBFC. Pawn tickets do not contain the specific details of the jewels pawned, their weight in grams and the assessed value of the jewels, etc. 10.5 As a prelude to such analysis, the Working Group identified some relevant basic features of the gold loan industry in the recent years.
12.7 The following regulations are presently applicable to NBFCs; these regulations also apply to gold loans NBFCs. 11.78 The Working Group recommends that gold loans NBFCs may obtain a copy of PAN Card in all the loan proposals exceeding rupees two lakhs to strengthen mechanism of KYC. 11.74 In the cases of auction of gold ornaments, it should be mandatory on the part of NBFCs to provide full details of value fetched by it in auction, outstanding dues adjusted and balance, if any, outstanding or payable to borrower by way of registered letter.
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In sum, there is a need and scope to consider new gold-backed products after careful evaluation of each product by relevant regulatory departments and regulators. 11.52 On interest rates charged to borrowers, the members of AGLOC submitted that range of interest was 12 per cent p.a (simple interest for 3 month maturity) to 26 per cent. According to them, the major portfolio is in the average interest rate of 24 per cent to 26 per cent and only https://1investing.in/ 2 per cent of the loan portfolio carries interest rate of 12 per cent. However, if the repayment is in default even by a single day, the interest rate is increased to higher slab for default period and likewise increases to higher slab for every additional period. Banks follows a set of procedures, which includes advertisements in the news papers, informing the borrowers well in advance the details of place and timing of the auctions as well.
While making this suggestion, the Group is conscious of the fact that currently only around 3 per cent of the population has income above the minimum limit chargeable to tax under Income Tax Act. With the majority of the gold buyers hailing from rural areas, a view prevails that the rural people are even otherwise not subjected to income tax and therefore fiscal incentive route may not be effective. However, the Group makes this suggestion keeping in view High Networth Individuals who are holding idle gold who may opt for the instruments with fiscal sops to diversify their portfolios. 12.21 Some independent estimates suggest that NBFCs may witness a decline of about 80 basis points on their profitability after the implementation of the new regulations.
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Growing demand for gold in the country especially in the rural side is an indication that households with high levels of savings are in need of instruments that are very easily accessible and equally attractive to gold in terms of return as well as liquidity. Banking sector should come forward to tap this huge untapped source of funds from being diverted to buy gold. It is necessary to introduce savings schemes and instruments that can provide real returns with high liquidity. However, the Group concedes that provision of real rates of return on savings presupposes prevalence of a low-inflation environment on a sustained basis. The schemes to be conceived should also ensure liquidity of the savings comparable to gold or gold jewellery. The dominant reason why a person may like to hold his savings in the form of gold is to hedge against inflation.
More importantly, such policy will prevent existing gold stocks from being monetised. The Group is of the considered view that it is desirable to liquidate large amounts of idle gold and use the hidden value in the idle stock of gold for mobilising resources for productive raloo rate purposes. Any restrictions on the loans against gold jewellery by individuals may lead to people going back to pawn brokers and money lenders to borrow. Therefore, the Working Group is not in favour of considering any limit on loans against gold jewellery by individuals.
Reserve Bank also relied upon the loan to value ratio to reduce the expansion of gold loans. Therefore, the Working Group recommends that there is a need for standardisation of the concept of ‘value’ in determining the ‘Loan to Value Ratio’. The Reserve Bank needs to take view on this and provide for a standard definition/approach to define the concept of ‘value’.
Therefore, once the business levels of these gold loans NBFCs come to a level as considered ‘appropriate’ by the Reserve Bank, there appears to be a case for revisiting at the currently prescribed ‘loan to value ratio’ of 60 per cent. 12.26 The recent reduction in the loan to value ratio to 60 per cent for the gold loan NBFCs by the Reserve Bank has been a reason for acrimony by the gold loan NBFCs. As demonstrated in the Working Group’s analysis of volatility in Gold prices and its impact on the gold loan NBFCs, the loan to value ratio to 60 per cent provides cushion for withstanding any price volatility due to unforeseen shocks. Having said that, the Group expresses its dismay at the differing ways in which the value of gold is determined by various gold loan NBFCs. Some companies add 10 to 15 per cent flat from the price of the gold as making charges and taxes before they consider the value of gold, thus, inflating the value of the metal before applying the loan to value ratio for deciding the quantum of loan to be given.
Assuming that assets of gold loan NBFCs grew at an average rate at which they had grown in the last three years, they would constitute about 33 per cent of total assets of the NBFCs-ND-SI sector by 2016 (Chart 10.6). 8.21 Besides, it needs to be noted that even when there is a fall in the gold prices, the loss to be booked depends on the value of jewels that may have to be auctioned and not on the value of entire collateral the gold loans NBFCs hold. Normally, the jewellery that may go for auction is in the range of 2 to 3 per cent of the entire collateral held per annum. 7A.5 In order to derive quantitative estimates regarding the causal impact of gold loans on gold imports, following simultaneous equation system, modelling demand and supply of gold, is employed.
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9.5 On the liabilities side, the growth of balance sheet of gold loan NBFCs was mainly contributed by borrowings from banks followed by debentures. On the positive side, the capital funds of gold loan NBFCs also contributed for the growth in balance sheet of gold loan NBFCs during the period under review (Chart 9.3). 8A.2 The hypothesis that gold loans by NBFCs can affect gold prices is not supported by granger causality test in bivariate framework. 5.24 The Working Group is of the opinion that in order to unlock the huge economic value lies with the idle gold in the country, there is an imperative need to conceive and introduce innovative gold-backed products in India.