RBI bars loan against gold ETF and MF

The Reserve Bank of India (RBI) today said banks and non-banking finance companies (NBFCs) would not be allowed to extend loans against units of gold exchange traded funds (ETFs) and gold mutual funds.

The move is aimed at curbing rising demand for the yellow metal.During the annual policy review earlier this month, RBI had told banks to ensure the weight of any specially minted gold coin did not exceed 50g per customer.

And, the amount of loan to any customer against gold ornaments, gold jewellery or gold coins, weighing up to 50g, should be within the Board-approved limit.

Banks have since asked RBI whether an advance against units of gold ETFs or gold MFs are permitted. As a result, the central bank clarified that the restriction also applied for such products.

Banks and MF houses, however, said the impact would be minimal, as banks did not have any significant exposure in this sector.

Sundeep Sikka, chief executive, Reliance Capital Asset Management, said lending against gold ETFs was not widespread.

“The majority of investors coming into these funds were retail investors. I don’t believe they look to leverage the product in such a manner. On an industry-wide basis, I don’t believe that the practice of using gold ETFs to obtain loans is of any significant scale,” he said.

Gold ETFs had assets under management of Rs 11,648 crore at the end of the March quarter, according to data from the Association of Mutual Funds in India.

Companies accounted for the bulk of the assets, at Rs 6,345 crore; retail investors were second with Rs 3,124 crore. Banks, foreign institutional investors and wealthy individuals accounted for the remaining amount.

“Advances against gold ETFs and mutual funds in the retail segment are negligible. In the institutional segment, too, there aren’t big advances,” said Ram Sangapure, general manager, Central Bank of India.

RBI has further clarified that no advances be given by NBFCs against bullion or primary gold and gold coins. It has also said NBFCs should not grant advances for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold ETFs and units of gold MFs.