The Reserve Bank of India (RBI) on May 8 issued a notice to specific non-bank financial companies (NBFCS), instructing them to strictly abide by the rules of the Income Tax rules on cash disbursal. This move comes weeks after the regulator imposed restrictions on IIFL Finance’s gold loans business for breaking this rule, among others.
The RBI warned NBFCs offering gold loans against crossing the Rs 20,000 cap on cash loan distribution. When issuing the advisory, the central bank cited Section 269 SS of the Income Tax Act, 1961, which stated no person can receive more than Rs 20,000 as a loan amount in cash.
In March, RBI banned IIFL Finance, a NBFC, from approving and disbursing new gold loans following "material supervisory concerns" and to safeguard the interests of the customers. One concern was related to higher cash disbursements than what were the regulatory norms.
“RBI is cracking down on gold loans on account of issues around valuation, auction, know your customer (KYC) and anti-money laundering (AML) amongst others which are more to do with the regulatory expectations from NBFCs and less from the customers. From a cash disbursal point of view the customers need to ensure that they submit their KYC documents from an ID and appropriately address verification standpoint so that they can claim the gold back once the loans are paid or they get the auction surplus back in case they are not able to repay the loans,” says Vivek Iyer, Partner, Grant Thornton Bharat.
RBI has stipulated that the maximum loan-to-value (LTV) for gold is 75 per cent. This means that the maximum loan you will get for your pledged gold will be 75 per cent of its value. Also, this is 75 per cent of the gold value and not the jewellery value.
“For instance, the jewellery may be made with 10 grams of 18-karat gold and may be valued at Rs 1 lakh. However, the value of 10 grams of 18-karat gold may be only Rs 55,000. This means that if you pledge that jewellery, instead of a Rs 75,000 loan, you will get only Rs 41,000 as a loan. Moreover, this loan will be deposited into your bank account and not provided to you as cash. You can withdraw the amount as cash but the disbursal will be in most cases an account transfer. The Income Tax Act, 1961 stipulates that the maximum loan amount that can be disbursed as cash is Rs 20,000. So if you opt for a cash disbursal, then the maximum loan you will be able to avail of is Rs 20,000. Even if the pledged gold is worth Rs 2 lakh or any other amount, this is the maximum you will get as cash,” says Adhil Shetty, CEO, BankBazaar.com.
The size of the gold loan market is around Rs 6 lakh crore up to FY23 and has grown with a compound annual growth rate (CAGR) of 12 per cent in the last 10 years. RBI is putting more checks on gold loan companies because Indian household gold holdings are more than 30,000 tonnes out of which only seven per cent has been pledged as collateral for the loan and this market has a huge opportunity to grow in the future too.
According to experts, you must keep a few things in mind before taking a gold loan. You need to evaluate the loan provider’s credibility and reliability. You must try to avoid loans from a jeweller or a small pawn shop as they are unlicensed and have unfavorable terms.
“NBFCs may be more accommodating when it comes to valuing your gold, and the process of applying for a gold loan is simple and uncomplicated. Make sure to compare interest rates between banks and NBFCs when making your comparisons. Select the one that promises a minimal and straightforward verification procedure, transparent costs, and lower interest rates. Also to take care of the point that last week, RBI asked gold loan NBFCs not to lend more than Rs 20,000 in cash for gold loan,” says Prithviraj Kothari, Managing Director at RiddiSiddhi Bullions Limited (RSBL).
