RBI revises gold lending norms for NBFCs

Published: May 25, 2015 09:03 (GMT+8)

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The Reserve Bank of India (RBI) has announced revised set of guidelines for Non-Banking Financial Companies (NBFCs) for lending against gold.

Author: Paul Ploumis22 May 2015 Last updated at 08:11:05 GMT

NEW DELHI (Scrap Monster): The Reserve Bank of India (RBI) has announced revised set of guidelines for Non-Banking Financial Companies (NBFCs) for lending against gold. As per the new circular issued by the RBI, these institutions are allowed to use spot gold price at commodity exchanges regulated by Forward Markets Commission (FMC). NBFCs are allowed to use spot gold price in determining the value of the metal before advancing loan against it.

Until now, the valuation of gold was arrived at as the average of the closing price of 22-carat gold for the preceding 30 days as quoted by the Bombay Bullion Association (BBA). The spot gold price could be used as the base for calculating the loan-to-value (LTV)- the eligible loan amount for borrower against the gold collateral. Earlier in January 2014, the RBI had raised the LTV ratio up to 75% of the assessed value of security from 60%. Consequently, NBFCs are allowed to lend up to 75% of the assessed value of gold.

The country’s central bank has formulated several policies over the time, in an attempt to streamline NBFC’s mode of operation. It had earlier notified that NBFCs are allowed to consider only the intrinsic value of gold content for the purpose of determining the maximum permissible loan amount. No other cost elements could be added. Also, NBFCs are required to provide certificate of purity on received gold to the borrower. This purity certificate could be used as the base for determining the loan amount and auction price, in case the borrower defaults on making repayments.

A Non Banking Financial Company (NBFC) in India is a company registered under the Companies Act, 1956 of India, engaged in a variety of businesses such as loans and advances, acquisition of shares, stock, insurance business and chit business.

NBFCs perform functions similar to that of banks; however there are a few differences in that an NBFC cannot accept demand deposits; an NBFC is not a part of the payment and settlement system and as such, an NBFC cannot issue cheques drawn on itself; and deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors, unlike banks.

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