RBI breather for banks offering gold loans but with riders

Allows lump sum payment at maturity; loan to become non-performing asset if margin not maintained

In a move that will bring relief to banks, the Reserve Bank of India (RBI) has allowed bullet repayment   — lump sum payment for entire loan at maturity — of loans taken against gold, except for agriculture purposes, at the end of its one-year tenure. This will help banks to avoid classifying the loan as non-performing, even it is not serviced for 90 days.

However, there is a caveat. Banks have been asked to prescribe a minimum margin to be maintained for such loans and fix the loan limit taking into account the market value of the security, expected price fluctuations, interest that will accrue during the tenure of the loan, among others. Banks have to classify the account as sub-standard even before the due date of repayment, if the prescribed margin is not maintained, RBI said. The scheme is applicable for loans up to Rs 1 lakh and the period of the loan not exceeding 12 months from the sanction date. Interest will be charged to the account at monthly rates but will become due for payment along with principal only at maturity. Banks can recognise interest income on such loans in their profit and loss account only on collection.

“In response to suggestions from banks and with a view to ensuring a level playing field among various market participants, it has been decided to permit bullet repayment of loans extended against pledge of gold ornaments and jewellery for other than agricultural purposes,” RBI said.  Gold loans are generally taken for consumption and not for income generation. Banks were seeing stress in their gold loan portfolio due to decline in repayment capacity of the borrower.

A senior official with Indian Overseas Bank said banks can now compete with gold loan companies. “This is going to be more useful in south India, where loans against gold jewellery is high.”

Apart from a few large banks, the loan against gold market is dominated by non-banking finance companies, which have a speedy loan sanctioning and stringent recovery policy.

The scheme has not been offered for gold loan companies. Earlier, the central bank had imposed a loan-to-value cap of 60 per cent for the gold loan companies, though it was not made mandatory for banks.