What Do RBI’s Draft Gold Loan Rules Mean For Companies Like Muthoot Finance?

The stocks of gold loan companies such as Muthoot Finance share price and IIFL Finance share price will remain in focus today. This is because the Reserve Bank of India (RBI) has released draft rules for gold loan companies.

These rules are aimed at improving risk management in the sector by ensuring adequate checks and balances for gold loan lenders. Let’s take a look at them.

Restrictions on Loans Against Certain Gold Assets

The RBI is worried about excessive lending against gold and silver. Gold is often used for saving and investing, but it is still a non-productive asset. This is because it doesn’t help in producing goods or creating jobs.

Therefore, the RBI has proposed to restrict lending against financial assets backed by gold and silver. This includes units of gold ETFs and mutual funds. Lenders like Muthoot Finance and IIFL Finance will not be allowed to provide loans if the ownership of the gold or silver collateral is doubtful.

At 10.39 AM, Muthoot Finance share price was down 6.71% and was trading at ₹1996.45.

Ownership Verification to Be Made Mandatory

Banks and financial institutions will be required to maintain proper records of how the ownership of gold collateral has been verified.

If the borrower cannot provide the original purchase receipt, they must submit a declaration or a suitable document explaining how the ownership was determined.

According to the draft guidelines, gold pledges must also follow the lender’s suspicious transaction reporting policy, as required by existing regulatory directions.

At 10.45 AM, IIFL Finance share price was down 0.40% and was trading at ₹324.

No Dual Usage of Same Gold Collateral

The RBI has made it clear that the same gold collateral cannot be used at the same time for both income-generating loans and consumption loans, regardless of the value. This is to ensure proper usage and monitoring of pledged gold assets. However, this condition will not affect the general right of lien that banks hold over assets used as collateral.

End-Use Monitoring and Evidence Required

Lenders will be required to install systems and controls to track the end-use of gold-backed loans. Periodic checks and supporting documents will need to be maintained.

For income-generating loans, documentary evidence of end-use will be compulsory. For consumption loans, lenders must define a threshold amount, beyond which documentary proof of end-use will also be mandatory. This ensures proper oversight of high-value consumption-based loans.

Loan Limits Based on Purpose

Banks and financial institutions must set a ceiling on the loan amount given to a single borrower against gold collateral. This ceiling must vary based on whether the loan is for income generation or consumption. It should be applied in a fair and non-discriminatory manner.

Conclusion

The RBI said the objective of these draft directions is to create a uniform set of rules across all lenders. The rules aim to fix current issues in lending practices, offer better clarity, and strengthen the conduct and accountability. They are likely to have a mixed impact on gold loan companies in the share market, especially in the short term.

Read more: Aurionpro Acquires Fintra Software to Strengthen Trade Finance Solutions

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.