Gold loans firms likely to face stricter norms

RBI panel recommends uniform valuation, curb on branch expansion, setting up of ombudsman

In a move to put a check to the mushrooming gold finance companies, which is seeing increasing number of customer complaints, a expert panel of the Reserve Bank of India (RBI) has suggested various measures in order to make the sector more transparent while doing business.

The RBI had set up a working group under the chairmanship of KUB Rao to study the issues related to gold and gold loans by non-banking finance companies (NBFCs).

The working group, in its draft report, has suggested that gold loan companies should consider only price of the yellow metal and not the jewellery making charges and other taxes while determining the value of the gold. Currently different NBFCs have different methodology of arriving at the value of the pledged gold.

However, the panel said that loan to value ratio -- which is currently capped at 60% -- might not a detrimental factor for all the ills associated as the LTV can be circumvented through “grossing-up” of the value of gold as per the discretion of the NBFC. In addition, NBFCs can grant top up loan through additional clean loans in the name of some other related individual. To curb this, the panel has asked RBI to be more vigilant during on-site inspections of NBFCs for such practices.

Though the working group said that the extant LTV cap can be reviewed upwards to 75% from present 60% but it has called for standardisation of the method to determine value of gold.

Gold loan NBFCs will also face the restrictions on number of branches if RBI accepts the working group’s recommendation. Currently, NBFCs don’t have any kind of restrictions on opening of new branches unlike banks. Group has suggested two ways for the same. For the gold loan, companies having more than 1,000 branches there would be mandatory approval by the RBI or there could be the ceiling on number of branches which a NBFC can open in a year. It has also called for consolidation of the existing network of these NBFCs due to rapid pace opening of new branches. According to feedback given to the group by customers many such new branches lack basic amenities and can put the security of the pledged gold at risk. Therefore all the branches should conform to a minimum standard in terms of borrower convenience and the safety of gold pledged, the committee said.

“This recommendation if accepted will only delay the process of opening our branches and throw open market for the moneylenders as we are largely opening branches in rural areas,” said Padma Kumar, executive director, Muthoot Finance.

The committee has also called for establishing an ombudsman like banks to address the large number of complaints received against the NBFCs.

It has also called for the rationalisation of the interest rates charged by the NBFCs in view of overcharging by the NBFCs and given the profile of the borrowers who are generally illiterate and come from lower middle class background. There could be either a benchmark rate linked to the maximum advance rate charged by the State Bank of India or introduction of a maximum cap which can be charged by the gold loan companies, committee suggested.

In case of auction of the pledged gold, the committee suggested that it should happen at the taluka headquarter of in which the branch is located. This will give a last minute opportunity for the borrower to reclaim his gold having a sentimental value for him, the committee said.