RBI Issues Revised Guidelines on Gold and Silver Loans: Key Rules for Borrowers and Lenders
The Reserve Bank of India (RBI) has released new Directions having a comprehensive nature in order to align, unify, and integrate the rules regulating lending against gold and silver collateral (including gold and silver jewellery, ornaments, and coins) among all regulated entities (REs)1. The RBI has historically limited lending against primary gold as part of its macro-prudential focus while permitting it against gold jewellery (that does not contain identifiable stone encrustation) and short-term gold coins, reducing overall borrower liquidity risk. While borrower liquidity and lender risk remain the overarching objectives, some variations existed in mandates for REs which led to regulatory angst. These new Directions stack, codify and clarify many of the existing standards in order to address prudential and conduct gaps. The emphasis is clarity in the regulatory space to encourage a transparent and resilient lending standard for gold and silver loan.
Scope of Application
The Directions apply to all loans offered by a broad spectrum of regulated entities. This includes Commercial Banks (excluding Payments Banks), Primary (Urban) Co-operative Banks, Rural Co-operative Banks, and all Non-Banking Financial Companies, including Housing Finance Companies. The scope encompasses loans for both consumption and income generation purposes, such as farm credit, where eligible gold or silver collateral is accepted as security.
General Conditions for Lending Against Eligible Collateral
Lenders need to develop a comprehensive credit policy addressing borrower and aggregate limits, maximum LTVs, valuation standards, and purity standards. The policy will also indicate the action for LTV breaches and documentation required for priority sector lending. Acceptable Standard Operating Procedures for assaying, valuer qualifications, and transparent auction processes are required. Among other things, loans of more than INR 2.5 lakh require some form of credit assessment, including repayment capacity, as part of the loan approval process.
Loans can be renewed, and top-ups can be leveraged but again will need credit assessment responses and must not exceed LTV ratios, and grants can be leveraged as long as standard loan classification is maintained, and previous interest has been paid for bullet renewals. Prohibitions include lending against primary gold/silver and bullet repayment of consumption loans cannot exceed 12 months. Pledged gold and pledged silver include aggregate weights across the secured gold/silver. Collateral will be based on actual purity, according to the valuation ascertained from a defined reference price provided by IBJA or other commodity exchanges regulated by SEBI and valuing the intrinsic value of the metal only. Maximum LTV ratios of consumption loans are expressed in tiers based on loan amount and tiers need to be adhered to for the tenor.
Conduct-Related Aspects
To ensure fairness, lenders must implement standardized, uniformly adopted procedures for assaying gold and silver collateral. The methodology for net weight and valuation must be publicly displayed. Borrowers must be present during assaying, with deductions clearly explained and documented. Any collateral loss or discrepancy must be promptly communicated to the borrower, along with compensation details. Loan documentation, including agreements, must be standardized, detailing collateral, auction procedures, and timelines. All charges must be transparently included in the loan agreement and Key Fact Statement (KFS). A detailed assay certificate must be provided to the borrower. All communication must be in the regional language or borrower’s chosen language, with explanations for illiterate borrowers witnessed by a non-employee.
Collateral Management
Lenders must establish robust infrastructure and security at branches handling gold and silver collateral. Handling and storage of pledged collateral must be by lender employees in secure vaults. Transporting pledged collateral is restricted to specific, justified scenarios. Regular reviews of storage, staff training, and internal audits, including surprise collateral verification, are mandatory. Upon full repayment, pledged collateral must be released within a maximum of seven working days. Auction procedures for defaulted loans must be transparent, with public notice in newspapers, and conducted by experienced personnel. A reserve price, not less than 90% of current value (85% if auctions fail twice), must be declared. The first auction must be physical and local, with options for adjoining districts or online for failed auctions. Lenders and related parties cannot participate in auctions. Post-auction, borrowers receive full details of proceeds, with the surplus refunded within seven working days.
Compensation Framework
The Directions establish a clear compensation framework. For lender-attributable damage to collateral, the repair cost is borne by the lender. For collateral loss or discrepancy, suitable compensation must be provided. Delays in collateral release due to the lender incurring compensation of INR 5,000 per day beyond the prescribed timeline. Lenders must communicate reasons for delays not attributable to them and periodically remind borrowers about unclaimed collateral. This compensation does not prejudice any other legal rights of the borrower.
Unclaimed Gold and Silver Collateral
Pledged gold or silver collateral unclaimed for over two years from loan repayment or settlement will be treated as unclaimed. Lenders must conduct periodic drives to locate borrowers or legal heirs for such collateral. A half-yearly report on unclaimed gold and silver collateral must be submitted to the Customer Service Committee or the Board for review.
Other Important Instructions
Lenders must avoid misleading advertisements for gold or silver collateral loans. All outsourcing and recovery arrangements must comply with existing guidelines. Loan disbursals should generally be to the borrower’s bank account, and all REs must adhere to the Master Direction – Know Your Customer (KYC) Directions, 2016, and relevant Income Tax Act provisions. Specifically, disbursals must go to the borrower’s account only, and loan servicing/repayment directly into the lender’s bank account, avoiding third-party or pool accounts. Multiple simultaneous loans to a single or related borrower group, being susceptible to fraud, will face stricter internal audits and supervisory examinations.
Conclusion
The RBI’s recent revised Directions on lending against gold and silver collateral is a significant step forward for a standardized, transparent and strong regulatory framework. By standardizing practices, clarifying operating procedures, and enhancing conduct, the revised Directions aim to improve borrower protection and safeguard the stability of the financial system. The focus on standardized practices, clear communication, disciplined management of collateral, and formalized compensation plans, clearly reflects the RBI’s expectations with respect to its regulated entities. All regulated entities will have to ensure compliance with the revised Directions to navigate the new regulatory environment effectively.
By entering the email address you agree to our Privacy Policy.