Rules Regarding Loans against Security of gold jewellery for NBFCs

Swetha Dhinesh

30 May, 2024

Gold has significant importance in Indian culture. People rely on it for quick financial assistance during times of need. However, the COVID-19 outbreak has dramatically raised the demand for gold loans. The spike in interest in gold loans is known to all NBFCs. As a result, they are upgrading their offerings to compete with the escalating market pressure. One of the standard types of financing offered by Non-Banking Financial Companies (NBFCs) in India is loans secured by gold jewellery. For NBFCs providing these loans, the Reserve Bank of India has developed a set of rules and guidelines. This blog will discuss the rules regarding loans against the security of gold jewellery for NBFCs.

Gold loan

A secured loan known as a “gold loan” uses gold jewellery as collateral security. In India, nationalised public banks, private banks, and other financial organizations like non-banking financial companies offer gold loans at competitive interest rates. The gold loan gave borrowers more freedom to utilise the money for any reason they choose, including education, a wedding, a company, an unexpected medical expense, and many other things, in contrast to other loans that have defined terms and restrictions for how the money must be used.

LTV Ratio

Loan-to-value (LTV) ratios are used by banks, financial institutions, and other lenders to evaluate lending risk. It speaks of the amount a buyer will receive in relation to the price of gold, or it represents the maximum amount that can be granted against the value of the gold jewellery. For instance, if the LTV is 70% and the jewellery is worth INR 1,00,000. The client can only get a maximum credit of INR 70,000.

RBI Guidelines on LTV Ratios for Gold Loans

Gold loan lenders had a 75% LTV ratio. However, the Reserve Bank of India published updated policies regarding gold loans in 2020. The RBI loosened lending requirements for gold loans by raising the LTV from 75% to 90% in a circular due to covid-19. But this is applicable till March 31, 2021. Starting from April 1, 2021, the previous LTV ratio of 75% will be continued.

Lending against the collateral of gold jewellery under RBI’s Fair Practices Code

In addition to the fundamental principles, NBFCs shall implement the following when lending to individuals against gold jewelry.

• They must implement board-approved lending against the gold policy that should, among other things, address the following:
• Necessary measures to guarantee that the RBI’s KYC regulations ¹ are followed and that sufficient due diligence is done on the customer before granting any loan.
• Proper assaying methods for the received jewels.
• Internal mechanisms for confirming ownership of the gold jewellery.
• Ample systems for keeping the valuables in secure possession, ongoing system reviews, employee training, and occasional internal auditor inspections to make sure the procedures are strictly followed. Normally, branches shouldn’t give out such loans without the necessary storage space for the jewellery.
• The jewels accepted as collateral should be properly insured.
• In the event of non-repayment, the borrower should be given ample warning before the auction. There should be no conflicts of interest, and the auction process must guarantee that all transactions throughout the auction, including those with group firms and linked entities, are conducted on an arms-length basis.
• Public notice of the sale should be given by placing advertisements in at least two publications, one in the local language and one in a national daily newspaper.
• The gold pledged will only be auctioned through auctioneers approved by the Board. 
• As a matter of policy, the NBFCs should refrain from taking part in the auctions themselves. 
• The policy shall also cover the systems and procedures to be put in place for dealing with fraud, including the separation of duties of mobilisation, execution, and approval.

• The loan agreement must also include information on the auction process.

Some Information Regarding NBFC Gold Loans

The following are a few crucial details about NBFC gold loans:

• If the loan is not repaid, the gold held as collateral will be sold at auction. 
• An individual or MSME can only use a gold loan facility against physical collateral security, including specially produced gold coins. Therefore, no NBFC or bank will offer gold loans secured by sovereign gold bonds or exchange-traded funds (ETF).
• The borrower can conveniently pay back the loan amount and any accrued interest at any branch location. However, in order to retrieve the gold that has been placed, the borrower must go to the bank where the loan was obtained.
• It is important to remember that only the jewellery’s gold value will be determined. It means that the value of precious metals or stones will not be taken into account when assessing collateral security.
• A bank will only offer a gold loan if the applicant has an account there. An NBFC, however, is not subject to the same restrictions.

Benefits of applying for a gold loan in NBFCs

Speedy processing: When asking for a loan from any NBFC, a person should look for a method that is simple, clear, requires few documents, and processes loans quickly.

The choice for interest payment: When giving a gold loan, non-bank financial companies give their clients simple repayment options. One of the most widely used methods is paying interest alone. According to this, a borrower may only pay interest during the loan term and the full loan balance at maturity. They also offer the choice of paying the loan back in EMIs. However, a lot of banks now provide their clients with this flexibility.

Minimal Processing Fees: When compared to any other loan that NBFCs offer, processing fees for gold loans are minimal. Additionally, this encourages the applicant to choose gold loans while requesting the loan. 

Low foreclosure costs: Borrowers can prepay their loans at low foreclosure costs before the loan tenure expiration. Numerous NBFCs permit the same with little to no pre-payment fees. The minimum loan term from the disbursement date may have certain requirements, though.

No income proof: Since many people do not file income tax returns, they are not eligible to apply for bank loans. Many NBFCs, however, do not require a minimum level of income documentation to approve and issue gold loans to their clients. 

Provide the best physical gold security: NBFCs offer gold loans with the smallest possible margin. Non-Bank Financial Companies securely store the jewellery. This means that you don’t need to worry because the company will keep your gold safe. 

Conclusion

NBFCs must abide by these laws and principles to maintain fair business practices, customer protection, and compliance with legal obligations. Additionally, borrowers should be informed of their rights and obligations when applying for loans from NBFCs with gold jewellery as collateral.

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Read Our Article: Gold Loan Market in India: Growth and Its Causes

1. https://www.rbi.org.in/CommonPerson/english/scripts/notification.aspx?id=2607#