The Reserve Bank of India (RBI) on Wednesday issued a set of instructions to banks offering gold metal loans (GML), directing them to strengthen their credit appraisal process in the wake of frauds committed by certain unscrupulous jewellers.
“It has come to our notice that some GML providing banks are extending gold metal loans mainly relying on stand-by LC/BG (letter of credit/bank guarantee) issued by other banks, without carrying out detailed credit appraisal. If the sales proceeds are not routed through GML providing banks, they are not able to monitor the end use of the gold lent. Further, banks issuing stand-by LC/BG often do not carry out proper credit appraisal of the borrowers,” the central bank said in a notification.
“Lack of proper monitoring mechanism and not ensuring end use of GML has resulted in certain instances of frauds / misuse related to GML by certain unscrupulous jewellers,” it added.
The banking regulator said banks that issue stand-by LC/BG must carry out rigorous credit appraisal exercise and treat stand-by LC/BG limit, which are considered non-fund-based limit, at par with the fund based limit.
It also advised banks disbursing GML to carry out independent credit appraisal of the borrower and not rely solely on stand-by LC/BG issued by other banks.
While assessing the credit requirement of GML customers, lenders need to take into account the track record and credit worthiness of borrowers, trade cycle of manufacturing activities, and collateral securities on offer. The credentials of jewellery makers availing GML need to be established by inputs from the market as well as from other sources, including credit information companies.
RBI also said banks offering GML may obtain relevant information from borrowers and share them with stand-by LC/BG-issuing banks. Inspection of stocks, quality check of the gold stock, verification of insurance cover, etc may be undertaken jointly or on rotation basis by the GML- providing bank and stand-by LC/BG issuing bank, it added.
“In case GML is given by the nominated bank to its own existing customers, gold metal loans under the scheme may be carved out within the credit limit sanctioned by the bank. In case of new borrowers, the gold metal loan limit may be fixed after carrying out a detailed credit appraisal and due diligence,” the central bank said.
GML can be availed of only by gold jewellers, who are themselves manufacturers of gold jewellery. The jewellers cannot sell the gold borrowed under GML scheme to any other party to manufacture jewellery.
RBI said banks may adopt a suitable board — approved policy on GML after considering its guidelines and the regulations issued by the foreign exchange department of the central bank related to import of gold.