RBI Wants to Reduce Glitter of Gold
RBI, yesterday released a draft report of the Working Group to study issues related to Gold.
The Report finds:
• Gold loans have a causal impact on gold imports substantiating the emergence of a liquidity motive for holding gold.
• International gold prices and exchange rate significantly and positively affect the gold prices in India.
• Increase in gold prices appears to be one factor that increase the gold loans outstanding.
• Increase in gold loans extended by NBFCs and banks, does not impact significantly the gold prices in India.
• On the basis of empirical analysis of volatility in gold price, it is difficult to estimate future prices of gold.
• Going by the past trends, a sharp sudden drop in gold price by 30 to 40 per cent is a remote possibility causing financial distress to the gold loan NBFCs.
• The extant loan to value ratio (LTV) ratio should provide a reasonable risk cover in case the gold prices fall by 10 per cent.
• Asset quality, NPAsas percent of total credit exposure and Capital adequacy of gold loan NBFCs are not a cause for concern at present.
• The sources of funds of gold loan NBFCs do not appear to be an immediate cause of concern giving rise to concentration credit risk.
• The striking growth of gold loan NBFCs business warrant that their operations may be closely monitored.
• Some gold loan NBFCs have been raising public deposits surreptitiously through unincorporated bodies raising concerns.
• Banking sector's existing exposure in the form of their individual gold loans appears small and may not have any significant repercussions for the stability of the banking sector at present.
• Probability of volatility in gold prices impacting the gold loan market is low.
• Gold loans NBFCs are subjected to prudential regulations and reporting requirements.
• Gold loans NBFCs are doing a socially useful function and that provides a strong rationale for a careful regulation of the activities of these NBFCs.
And Recommends:
• There is a need to moderate the demand for gold imports considering its impact on the current account deficit
• Fiscal measures to reduce the gold imports may be revisited
• Banks need to design innovative financial instruments that can provide real returns to investors
• Need to convert both rural and urban demand for gold into investment in gold-backed financial instruments through dematerialisation of gold
• Introduction of tax incentives on instruments that can impound idle gold may be considered
• There is a need to recycling of domestic scrap gold
• Limits on the volume and value of gold to be imported by banks may be considered, if required under extreme situation
• Consider imposing export obligation on bulk gold importers
• Banks may expand their gold jewellery loan portfolio to monetise the stocks of idle gold
• The debate on setting up of a gold bank may be revisited
• Banks may continue their role as nominated agencies in gold imports
• Differential pricing of banking services and finance for gold imports may be considered
• Bank finance to purchases of gold bullion may be prohibited
• There should not be any curb or limits on advances against gold jewellery and gold coins by individuals
• Banks may continue retailing of gold coins, given their small volume
• There is no strong case to exempt Metal Gold Loans from the base rate stipulations
• There is an imperative need to consider introducing new gold-backed financial products to unlock the hidden economic value in the idle gold in the economy
• Products like Gold Accumulation Plan, Gold Linked Account, modified Gold Deposit and Gold Pension Product may be considered for introduction
• Careful evaluation of each of the proposed gold-backed product is critical
• The rapid growth of the assets, borrowings and branch network of gold loan NBFCs need to be monitored continuously
• The exemption available to secured debentures from the definition of "deposit" may be reviewed
• There is a need to thoroughly review the operational practices followed by gold loans NBFCs
• There is a need to ensure transparent communication of loan terms by gold loans NBFCs
• Need to review the auction procedure by gold loans NBFCs
• Location of auctions should be same Taluka where the borrower is located
• Standard documentation to be followed by gold loans NBFCs
• Use of PAN Card for large gold loan transactions
• Payment through cheque for large gold loan transactions
• As of now, there is no case for conceding level playing field for the gold loan NBFCs with the banks
• There is a case for review of the extant ‘loan to value ratio'
• There is need for a clearly-defined and standardised concept of the term ‘Value' for prescribing appropriate ‘Loan to Value Ratio'
• Unbridled growth of branches by large gold loan NBFCs needs to be moderated
• There is a need for an ombudsman to address the grievances of gold loan borrowers
• Rationalisation of interest rate structure by gold loans NBFCs
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