In a move to check the mushrooming of gold finance companies, a panel of the Reserve Bank of India has suggested various measures to make the sector more transparent while doing business.
RBI had set up a working group under the chairmanship of K U B Rao,a senior executive, to study issues related to gold and gold loans by non-banking finance companies (NBFCs). Their draft report has been published on the central bank’s website for suggestions.
The group has suggested gold loan companies should consider only the price of the yellow metal and not the jewellery making charges and other taxes in determining the value of the gold. Currently, different NBFCs have different methods to arrive at the value of pledged gold.
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It has said the loan to value ratio (LTV), capped at 60 per cent, can be circumvented through “grossing-up” the value of gold by an NBFC. And, NBFCs can grant a top-up loan in the name of a related individual. To curb this, the panel has asked RBI to be more vigilant during on-site inspections of NBFCs for such practices. It has said the extant LTV cap can be reviewed upwards to 75 per cent from the present 60 per cent.
Gold loan NBFCs will also face restrictions on the number of their branches if RBI accepts the working group’s recommendation. Currently, NBFCs don’t have any restrictions on opening of new branches, unlike banks. The group has suggested two ways to check this. For gold loan companies having more than 1,000 branches, there could be mandatory approval by RBI for a new one or there could be a ceiling on the number an NBFC can open in a year. It has also called for consolidation of the existing network of these NBFCs due to the rapid pace opening of branches. According to feedback given to the group by customers, many such new branches lack basic amenities and can put the security of the pledged gold at risk. Therefore, all the branches should conform to a minimum standard in terms of borrower convenience and the safety of gold pledged, the committee said.
“This recommendation, if accepted, will only delay the process of opening our branches and throw open the market for moneylenders, as we are largely opening branches in rural areas” said Padma Kumar, executive director, Muthoot Finance.
The committee has also called for establishing an ombudsman, as done for banks, to address the large number of complaints against such companies.
It has also called for the rationalisation of the interest rates charged, given the complaints of overcharging and the profile of borrowers, generally illiterate and from a lower middle class background. There could be either a benchmark rate linked to the maximum advance rate charged by the State Bank of India or introduction of a maximum cap, it suggested.
In the case of auction of pledged gold, the committee suggested it happen at the taluka headquarters in which the branch is located. This will give a final opportunity for the borrower to reclaim gold having a sentimental value, the committee said.
