While prohibiting NBFCs from issuing misleading, the central bank asked them to value gold jewellery accepted as collateral at the average of closing price of 22-carat gold in past 30 days

Seeking to keep the demand for gold under check, the Reserve Bank of India (RBI) has tightened the norms for loans against gold jewellery.

In a notification, the RBI said, “In order to standardise the valuation and make it more transparent to the borrower, it has been decided that gold jewellery accepted as collateral will have to be valued at the average of the closing price of 22 carat gold for the preceding 30 days as quoted by the Bombay Bullion Association (BBA)."

Currently, there is no standard method for arriving at the value of gold accepted as collateral and the valuation is arbitrary and opaque.

While accepting the gold as collateral, RBI said non-banking financial companies (NBFCs) should give in writing to the borrower, on their letterhead giving the purity (in terms of carats) and weight of gold.

If the gold is of purity less than 22 carat, the NBFC should translate the collateral into 22 carat and state the exact grams of the collateral. In other words, jewellery of lower purity of gold shall be valued proportionately.

The loan to value ratio for loans against jewellery will be 60%.

The notification further said NBFCs financing against the collateral of gold must insist on a copy of the PAN card of the borrower for all transactions above Rs5 lakh. High value loans of Rs1 lakh and above must only be disbursed by cheque. It also directed gold loan companies to standardised documentation across all branches.

"It has been decided that where the gold jewellery pledged by a borrower at any one time or cumulatively on loan outstanding is more than 20 grams, NBFCs must keep record of the verification of the ownership of the jewellery. The method of establishing ownership should be laid down as a Board approved policy,” the notification said.

The central bank has also prohibited NBFCs from issuing misleading advertisements like claiming the availability of loans in a matter of two-three minutes.

Noting that unbridled growth may not be in the overall interests, RBI has also tightened the rules for opening branches by such NBFCs.

“NBFCs, which already have more than 1,000 branches, may approach RBI for prior approval for any further branch expansion,” it said.

Besides, it said that no new branches will be allowed to be opened without the facilities for storage of gold jewellery and minimum security facilities for the pledged gold jewellery.

With regard to auction, the notification said that it should be conducted in the same town or taluka in which the branch that has extended the loan is located.

While auctioning the gold, the NBFC should declare a reserve price for the pledged ornaments, it said, adding that this should not be less than 85% the previous 30-day average closing price of 22 carat gold as declared by BBA.