RBI tightens rules for lending against gold

Says lenders need to value pledged gold at average closing price of 22-carat gold for preceding 30 days

The Reserve Bank of India (RBI) has tightened rules for finance companies which lend against gold, a fast-growing business in the country, in line with the recommendations of an internal panel.

The RBI said lenders need to value the pledged gold at the average closing price of 22-carat gold for the preceding 30 days as quoted by the Bombay Bullion Association Ltd, to arrive at the loan-to-value ratio.

The ratio would remain at 60% for loans against jewellery.

"Currently, there is no standard method for arriving at the value of gold accepted as collateral and valuation is arbitrary and opaque," the central bank said in a notification issued late on Monday.

Shares of gold-based lenders slumped, with Muthoot Finance Ltd falling 6.4% and Manappuram Finance Ltd down 3.7% on Tuesday.

The central bank also streamlined the process by which lenders auction gold when a borrower defaults, saying lenders need to declare a reserve price for the pledged ornaments.

Lenders would also need RBI approval to open branches exceeding 1,000. No new ones would be allowed without adequate storage facility for gold.

"Unbridled growth may not be in the overall interests of the concerned NBFC or the sector and there is a need for consolidation of the existing network," the central bank said.

Muthoot Finance has 3,801 branches and Manappuram Finance has 3,293, according to their websites.

A Muthoot spokeswoman did not have immediate comment, while an official from Manappuram Finance was not immediately reachable for comment.