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Commentary

No More Gold Loans From Banks

The RBI, in the October Policy banned loans against Gold, citing that it causes speculative trading in the yellow metal. A notification has now been issued:

Bank finance for purchase of gold

Please refer to paragraphs 102 and 103 (extract enclosed) of the Second Quarter Review of Monetary Policy 2012-13 announced on October 30, 2012, proposing that other than working capital finance, banks are not permitted to finance purchase of gold in any form.

2. In terms of extant guidelines issued vide circular DBOD.No.Leg.BC.74/C.124(P)-78 dated June 1, 1978, no advances should be granted by banks against gold bullion to dealers/traders in gold if, in their assessment, such advances are likely to be utilised for purposes of financing gold purchase at auctions and/or speculative holding of stocks and bullion. In this context, the significant rise in imports of gold in recent years is a cause for concern as direct bank financing for purchase of gold in any formviz., bullion/primary gold/jewellery/gold coin etc. could lead to fuelling of demand for gold. Accordingly, it is advised that no advances should be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold Mutual Funds. However, banks can provide finance for genuine working capital requirements of jewellers. The scheme of Gold (Metal) Loan detailed vide our circular DBOD.No.IBS.BC/ 1519/23.67.001/1998-99 dated December 31,1998, as amended from time to time, will continue to be in force.

(Emphasis mine)

This means no more loans against *purchase of* Gold in any form. including overdrafts with gold as security and so on.

Edit: It seems this only applies to loans for the purchase of gold, not loans with gold as security. Apologies.

According to a Cognizant Report, the market for Gold Loans was around Rs. 50,000 cr. (500 bn) in 2011, and of that, around 55-60% was with banks. (46% with public sector banks). The loans are of 6 months to 2 years in duration, with an interest rate of between 12% and 15%. Lending will contract to that extent over the next year or so, and borrowers will need to either return the money or provide fresh collateral to renew loans.

Currently, banks lend to NBFCs (Mannapuram, Muthoot etc) which then further lend against gold. That can continue ("indirect" financing). We are likely to see a movement of the loans to the NBFCs, and further, to moneylenders and pawn shops.

One argument would be that the RBI should similarly curb lending to real estate which has just about the same level of speculation. However I fully support the legislation – leverage compounds speculative interest, and loans are leverage. We should effectively cut all real estate second purchases (i.e. if a person already has a house) to only 25% of the house value.

  • Anon says:

    I understand it not as ‘no more loans against gold’, but as no more loans for buying gold!
    Please correct me if I am wrong – can individuals still get personal loans against gold from banks

  • fubar says:

    As of now, all interest payments for loan on second home are tax free (full amount deducted from taxable salary). The govt. has no intention of even touching the real estate bubble. The just have some problem with gold.

    • Dheeraj says:

      fubar,
      This tax free interest on second home is a myth. You also have to declare rental income against it. So it’s only a deduction against an income.
      Of course, the advantage is that you can declare an income significantly less than the deduction (interest payment) and so claim significant tax shield.
      Even if you dont actually have rental income the taxman will impute a fair rental value to the home.
      Thought I’ll just clarify, that this belief that the entire interest is deductible is not true.

  • Anand says:

    All the banks takes is an undertaking that the money disbursed will not be used to purchase gold. Once the money is disbursed, the customer can do whatever he wants. Same rule applies for purchase of real estate and investment in stock market.

  • Shankar says:

    This sounds like a papery law, without much context.
    How can we track if a loan is used for gold purchase or not?

  • Nirav Shah says:

    The Govt. does not want to touch Real Estate for multiple reasons –
    1. Real Estate is one of the biggest money laundering machine for politicians.
    2. Each politicians hold multiple properties and any adverse regulations for Real Estate will wash away a substantial part of their personal wealth. Politicians and beauracrats cant see their wealth erode.
    3. There is a strong Real Estate lobby with cabinet ministers heading the lobby.

  • Shashibhushan says:

    Can you please elaborate on: “We should effectively cut all real estate second purchases (i.e. if a person already has a house) to only 25% of the house value”?

  • akash parmar says:

    Hi Deepak,
    Since you touched upon realty in this mail I would like to ask one question:
    Yesterdy FM Chidambaram talked about banks bailing out builders with incompleted projects. Does this mean that PSU banks are in big trouble?
    Reason for question:
    Such a move would be definitely seen as partial to builders and invite criticism from common people. The reward would , however, be the reduction of bad loans for NPA. Due to the potential for criticism one would expect such a decision only when the rewards outweigh the risks.
    If rewards do outweigh the risks, it means the exposure of Banks to real estate(builders) is quite high.

  • Prax says:

    The govt seems to be in a money printing spree and is dissuading investment in gold
    what are the avenues for savers especially considering the govts impending announcement of a cash transfer program mixed with or without a food security bill which sees it transferring cash to all and sundry and per bpl family if it transfers 30 to 36000 , considering how rules are bent and how things can be fixed,, a massive %age of population can be seen demanding this …

  • Kaushik says:

    I personally like the “cash transfer programme” because I fully have faith on the fact that ‘general bpl public’ is less efficient than ‘present entitled group’ to use up the free dole. The money transfer will ensure votebank but in longterm bpl public will suffer.
    I like this because it will pull in deflation in essential commodities. Productive communities will gain wealth.