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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.

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