RBI releases Draft Report of its Working Group on Gold

The Reserve Bank of India (RBI) today placed on its website, the Draft Survey of the Functioning Group to review the Issues Linked to Gold and Gold Loans by nonbanking BOAT LOAN COMPANIES (NBFCs) in India (Chairman: Shri K.U.B.Rao, Adviser, Section of Economic and Plan Research). The Reserve Lender has sought responses on the draft survey from stakeholders and open public. The comments may be mailed up to Friday, January 18, 2013.

The Working Group was assigned with the task of studying whether large gold imports of India are a threat to external stability. The Working Group was also asked, among other stuff, to review the recent tendencies in precious metal loans extended by huge gold mortgage NBFCs and find whether there are any systemic balance issues that arise from the interconnectedness between banking institutions and precious metal loans NBFCs. The Working Group followed an eclectic approach to address the conditions of reference designated by undertaking specialized exercises to study the partnership among various related financial variables; and to conduct surveys through intense dialogue with all the stakeholders to firm up related views. Existing regulations related to NBFCs-Non-Deposit taking (ND) – Systemically Essential (SI) sector were examined and suggestions were offered.

RBI reviews policy

Gist of the Functioning Group’s Report:

Macro Issues

Large gold imports are adversely impacting the existing account deficit. There is a need to moderate the demand for gold imports, as ensuring external sector’s stability is critical. It is necessary to discover that demand for gold in India isn’t strictly amenable to plan changes and in addition is price inelastic because of varied reasons. Banks’ function in canalising gold imports is certainly important, but provides been declining through the years. There is usually scope for reviewing the current incentives available for banks to deal with gold imports. In the context of growing demand for gold, it is critical to ensure real returns to traders through various cost savings products, to ensure that their attention could be diverted from gold, at least, partly. There exists a dependence on banks to introduce brand-new gold-backed financial loans that may decrease or postpone the demand for gold imports. Investors’ awareness and education is important in the context of channelising the expense to gold-backed financial products. The Working Group believes that offering true rate of return to investors through alternate instruments holds the key to reducing the excessive demand for gold. In the mean time, there is also a have to increase monetisation of idle gold stocks in the economy for productive purposes. Encouraging loans against the security of gold for successful purposes could be a real way to get this done.

Micro Issues

The financial performance of the gold loans NBFCs and the existing degree of their borrowings from the bank operating system aren’t of critical concern. There is apparently no instant systemic implications with regards to domestic financial stability because of the interconnectedness of gold loans NBFCs and bank operating system. Banks and NBFCs may continue to deliver gold jewellery loans, which monetise the idle gold in the country. The gold loan market has grown well in recent years. It is time for consolidation of the functions of the gold mortgage NBFCs. The gold loan NBFCs need to transform themselves into establishments free of complaints, have correct auction and documentation techniques, with rationalised interest structure and also have a branch network that’s fully secure and safe and sound.

Key Recommendations

Key suggestions of the Operating Group are:

There is a need to moderate the demand for gold imports considering its impact on the current account deficit

Fiscal measures to reduce the gold imports might be revisited

Banks need to style progressive financial instruments that can provide real returns to investors

Need to convert both urban and rural demand for gold into investment in gold-backed monetary instruments through dematerialisation of gold

Introduction of tax incentives on instruments that can impound idle gold may be considered

There is a have to recycling of domestic scrap gold

Limits on the quantity and value of gold to be imported by banks may be considered, if required under extreme situation

Consider imposing export obligation on bulk gold importers

Banks might expand their gold jewellery loan portfolio to monetise the stocks of idle gold

The debate on setting up of a gold bank could be revisited

Banks may continue their role seeing that nominated firms in gold imports

Differential pricing of banking services and finance for gold imports may be considered

Bank finance to purchases of gold bullion may be prohibited

There should not be any kind of curb or limits in developments against gold and jewellery coins simply by individuals

Banks might continue retailing of coins, given their small volume

There is no strong case to exempt Metal Gold Loans from the base rate stipulations

There is an imperative need to consider introducing new gold-backed financial products to unlock the hidden economic value in the idle gold in the economy

Products like Gold Accumulation Strategy, Gold Linked Account, modified Gold and Deposit Pension Product could be considered for introduction

Careful test of every of the proposed gold-backed product is crucial

The rapid growth of the assets, borrowings and branch network of gold loan NBFCs have to be monitored continuously

Need to reduce the interconnectedness of gold loan NBFCs with the formalized financial system gradually

Declining capital adequacy ratio – Need to improve the capital of gold loan NBFCs

Need to evaluate the current stipulations regarding raising of assets through NCDs simply by gold loan NBFCs

The exemption open to secured debentures from this is of “deposit” could be reviewed

There is a dependence on monitoring transactions between gold loan NBFCs and unincorporated bodies

Though leverage of the gold loan NBFCs is not a cause for concern at the present juncture, going forward, there is a need for improving owned funds of the NBFCs

There is a need to review the operational practices followed by gold loans NBFCs thoroughly

There is a must ensure transparent communication of loan conditions by gold loans NBFCs

Institution of a person grievances and problems redressal program by gold loans NBFCs is important

Have to review the auction treatment by gold loans NBFCs

Location of auctions ought to be same Taluka where in fact the borrower is located

Post-auction safeguards to end up being accompanied by gold loans NBFCs

Better disclosure specifications to be accompanied by gold loans NBFCs

Monitoring the execution of the Fair Practices Code

Regular documentation to be accompanied by gold loans NBFCs

Usage of PAN Card for huge gold loan transactions

Payment through cheque for large gold loan transactions

As of now, there is no full case for conceding level playing field for the gold mortgage NBFCs with the banking institutions

There exists a case for review of the extant ‘loan to value ratio’

There is need for a clearly-defined and standardised concept of the term ‘Value’ for prescribing appropriate ‘Mortgage to Value Ratio’

Unbridled development of branches by huge gold loan NBFCs must be moderated

There is a dependence on an ombudsman to handle the grievances of gold loan borrowers

Rationalisation of interest framework by gold loans NBFCs

Major Conclusions

Gold loans have a causal effect on gold imports substantiating the emergence of a liquidity motive for holding gold

International gold prices and exchange rate significantly and positively affect the gold prices in India

Increase in gold prices appears to be one factor that increase the gold loans outstanding

Increase in gold loans extended by banks and NBFCs does not impact considerably the gold prices in India

Based on empirical analysis of volatility in gold cost, it really is difficult to estimate future prices of gold

Going by days gone by trends, a sharp unexpected drop in gold price by 30 to 40 per cent is a remote possibility causing financial distress to the gold loan NBFCs

The extant loan to value ratio (LTV) ratio should provide a reasonable risk cover in case the gold prices fall by 10 %

Asset quality, NPAs according to cent of total credit publicity and Capital adequacy of gold loan NBFCs are not a cause for concern at present

The sources of funds of gold loan NBFCs do not appear to be an immediate cause of concern giving rise to concentration credit risk

The striking growth of gold loan NBFCs business warrant that their functions could be closely monitored

Some gold mortgage NBFCs have already been raising open public deposits surreptitiously through unincorporated bodies raising concerns

Banking sector’s accessible publicity in the type of their individual gold loans appears small and might not exactly possess any critical repercussions designed for the balance of the banking sector at the moment

Possibility of volatility in gold prices impacting the gold mortgage market is low

Gold loans NBFCs are put through prudential reporting and regulations requirements

Gold loans NBFCs are doing a socially useful function and that provides a strong rationale for a careful regulation of the activities of these NBFCs

The recent slew of regulatory measures taken by RBI on the functioning of the gold loan NBFCs may be continued to ensure a healthy growth of the sector in the medium and very long term


It may be recalled that in the Monetary Policy Statement 2012-13 announced on April 17, 2012, the constitution a Working Group to study the gold loan market in India, which has shown rapid strides in recent years. The large rise in the gold loan business, the branch network of gold mortgage NBFCs, level of loans disbursed and the quantum of lender borrowings raised particular regulatory concerns. There have been also macroeconomic problems like impact of huge gold imports on exterior sector stability. Accordingly, an operating Group was constituted beneath the Chairmanship of Shri K.U.B.Rao, Adviser, Department of Economic and Policy Research, RBI. The Working Group had internal people from different departments like Section of Economic Analysis and Policy, Department of nonbanking Supervision, Section of Banking Operations and also Development, Department of Information and Statistics Management and Financial Stability Unit. This Draft Record has considered remarks received internally from Financial Marketplaces Committee People and the remarks from FSDC Sub-Committee People.

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