RBI exploring longer tenure gold loans

The Reserve Bank of India is exploring whether the gold loan tenure which is 180 days maximum at present can be extended for one year or even higher. The central bank has already held two separate meetings on this issue with jewelers and banks active in gold loans. However, no decision has been taken so far, but industry players expect a decision 'very soon'.

Jewellers recently put up their case to have a higher tenure gold loan. "Gold metal loans are treated equally with cash credit or any working capital loans. Since these loans are reviewed and limits renewed every year, same principals should be applicable to gold metal loans," said Sanjeev Agarawal, co-chairman, FICCI committee on gems and jewellery.

Gold metal loan business is such that banks usually take gold on lease from overseas market and lent that to local jewelers since globally gold is available on 1, 2 or even 3 year lease, same can be lent in India to jewelers with a longer tenor. While cost of lease globally is around 1%, in India it depends upon credit worthiness of the jewelers banks charge interest ranging from 3.5 to 6.5 per cent. Some of the banks who are getting gold under gold monetization for short term tenure (1 to 3 years- from temples as of now) have also sought longer tenure for gold loans to lend such gold simultaneously.

Globally, in countries like China and UAE, there is a practice and banks are allowed to lend gold to jewelers for higher tenor, even for more than a year.

Banks are not on one voice on this because, "we can monitor performance of gold metal loans if they are renewed every six months," said a banker.

Sources believe: "RBI may extend the gold term loan from current 180 days to 365-730 days. As all sides have presented their case." However, they also maintain that rather than making higher tenure a norm, "RBI may fix an upper limit tenure cap and leave it to bank to decide the tenure of gold loan within that upper limit depending upon borrowers' credential."

Banks have another issue with the higher tenure loan as they will lose revenue earned by means of premia when gold is quoted at a premium in local market and they also get a small fee whenever gold metal loan is renewed. If the tenor is extended, they will lose this income.

The current tenor is for 180 days, jewelers are forced to close the loan and take a fresh one or renew it. On the other hand, if it is 360 days and it is a situation as these days, then retailers will prefer to keep the loan open and buy from spot market at a discount whenever jewellery made out of borrowed gold is sold.

Higher tenure gold metal loan will be good news for jewellery industry and can help revive those in stress. Industry sources believe that, RBI may allow banks to buy gold from accredited Indian refiners as a way to settle loan. India is in any case developing its own gold standard with mandatory hallmarking and some refineries have already started making ISI marked gold bars, which should be acceptable to banks.