RBI Tightens Norms for Lending Against Jewellery

The Reserve Bank of India has tightened the screws on gold loan Non-Banking Finance Companies to protect borrowers against unfair practices and check the unbridled growth of such NBFCs.

The central bank has mandated that the gold the NBFCs receive as collateral should be valued transparently. This valuation will be based on the average closing price of 22 carat gold in the preceding 30 days as quoted by the Bombay Bullion Association (BBA).

“While accepting the gold as collateral, the NBFC should give in writing to the borrower, on its letterhead, the purity (in terms of carats) and weight of the gold,” the RBI said.

The central bank said that if the gold is of purity less than 22 carats, the NBFC should translate the collateral into 22 carat equivalent and state the exact grams of the collateral.

Further, to ensure that stolen jewellery does not find its way into the formal financial system, the RBI asked NBFCs to keep a record of the verification of the ownership.

This must be done where the gold jewellery pledged by a borrower at any one time or cumulatively is more than 20 gm.

The RBI said it is compulsory for NBFCs to insist on the permanent account number (PAN) of the borrower if the transaction value is more that Rs 5 lakh.

Also, high value loans of Rs 1 lakh and above must be disbursed only by cheque.


The central bank asked NBFCs to stop misleading advertisements that claim loans get issued within minutes.

“It is impossible to issue loans in such a short timeframe. Even 30-40 minutes are not enough for doing KYC (Know-Your-Customer) verification properly,” a senior RBI official remarked last week.

In the case of non-repayment of loans, NBFCs must auction the gold in the same town or taluk where the loan was given.

The central bank also made it mandatory for NBFCs to provide full details of the value fetched in the auction and the outstanding dues adjusted.

It also said that any amount received over and above the loan outstanding should be paid back to the borrower.


The RBI observed that branches of some NBFCs, whose major portfolio is lending against gold jewellery, lack the facilities for storing the gold ornaments taken as collateral and often these have to be moved to larger branches with safe deposit vaults.

“This endangers the safety of gold,” the RBI said, and asked the NBFCs to put in place an infrastructure at all their branches to safeguard the gold jewellery and coins deposited with them. .

Further, the RBI has found that many NBFCs also expand rapidly without paying adequate heed to internal controls.

To remedy this, the RBI said that such NBFCs will have to get the central bank’s permission to grow their network beyond 1,000 branches.

Business Line, New Delhi, 18-09-2013

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