Rules NBFCs Should Follow When Taking Your Gold; RBI Bars IIFL Ltd. from Sanctioning Gold Loans

RBI bans IIFL Ltd., from sanctioning gold loans after it violates RBI guidelines. Read RBI guidelines that should be followed if you are applying for a gold loan.
Rules NBFCs Should Follow When Taking Your Gold
Rules NBFCs Should Follow When Taking Your Gold

The Reserve Bank of India (RBI) banned IIFL Finance Ltd., an NBFC (Non-finance Banking Company) from sanctioning or disbursing gold loans, on March 4, 2024, effective immediately.

This ban comes after an RBI inspection revealed several supervisory concerns in the company's gold loan portfolio, including deviations in gold purity assessment, and breaches in the Loan-to-Value ratio among others.

The NBFC assigning/ securitising/ selling any of its gold loans. "The company can, however, continue to service its existing gold loan portfolio through usual collection and recovery processes," RBI said.

What Are Violations?

"Serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default. There are breaches in the Loan-to-Value ratio," RBI said.

It also noted significant disbursal and collection of loan amounts in cash far in excess of the statutory limit, non-adherence to the standard auction process, and lack of transparency in charges being levied to customer accounts, etc.

These restrictions aim to safeguard the interests of customers, RBI added saying The business restrictions will be lifted if, in the next audit, it is found that NBFC has changed course and is in compliance with RBI directives.

Meanwhile, shares of IIFL Finance witnessed a huge drop, of 20 per cent or Rs 119.4 today on the BSE at Rs 478.5 per share, a day after the RBI's ban on gold lending.

Understanding RBI Guidelines on Gold Loans

The RBI's specific guidelines for loans sanctioned against gold ornaments and jewellery by banks and Non-Banking Financial Companies (NBFCs) states the following:

Loan-to-Value Ratio: Loans against gold ornaments (including bullet repayment loans) should not exceed 75 per cent of the value of ornaments.

Interest Rate: The Reserve Bank has not specified any interest rate that can be charged by any NBFC. However, NBFCs are advised to adopt a Fair Practice Code with their board approval for transparent interest rate disclosure.

Unform Valuation: Gold ornaments accepted as collateral must be valued at the average closing price of 22-carat gold for the preceding 30 days as quoted by the India Bullion and Jewellers Association Ltd. If the gold is of purity less than 22 carats, the bank should translate the collateral into 22 carats and value the exact grams of the collateral. In other words, jewellery of lower purity of gold shall be valued proportionately.

Bullet Repayment: The amount of loans sanctioned under bullet repayment terms should not exceed Rs. 1 lakh and must be repaid within 12 months.

Margin Maintenance: Banks should prescribe a minimum margin to be maintained in bullet repayment loans and accordingly, fix the loan limit taking into account the market value of the security (gold ornaments), expected price fluctuations, interest that will accrue during the tenure of the loan etc.

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