In recent years, the amount of gold that is imported from foreign countries has been increasing rapidly. This puts us in the lower bound of the equation as India is a nation that is under UN debt and is already working in a deficit budget. The number of imports is being regulated under the new central administration. Hence imported commodities with the highest revenue are being targeted and are being put into regulations to curb them.
In such a situation if banks will grant direct financial advances in gold, the situation would worsen. This will fuel the demand for purchase of gold via Bullion/ primary gold/ gold coin/ jewelry etc. The banks have been asked to not grant any advances for purchase of gold on coins, jewelry or bullion, and primary gold. They can grant advances only to jewelers according to their work requirements. As the gold coins issued by the banks do not come under either primary or bullion gold, advances can be granted for these but the limit of the same would be 50 gms per person.
Advances against Gold Ornaments
Loan to value ratio: Loans on gold that are sanctioned should not value more than 75% of the value of gold ornaments. The LTV of 75% is to be maintained for the entire duration of the loan. The valuation of the gold is to be done accordingly too. There are mandated regulations on this. This valuation is done in a standardized way as this will make it easier for the borrower to understand. The price of gold will be the closing price of 22-carat gold observed in the past 30 days. If the gold offered is of inferior quality than 22 carats then, first, the gold will be converted into 22-carat terms and then evaluated.
Loans for other than the agricultural purposes: These loans will also follow guidelines like the tenor. It should not be more than 12 months after the sanction date. Accrual basis can be observed only if the account is standard and interest will be charged monthly. Other provisions like asset clarification and income recognition will only be done if the interest is overdue.
Hallmarked jewelry: The jewelry that is hallmarked helps determine its purity and finesse. It makes the job of banks easier and safer to deal with hallmarked jewelry. Preferential treatment will encourage this behavior. Hence banks should keep in mind the hallmarked jewelry and grant interest accordingly.
Gold loans can be extended to exporters of jewelry by accepting a standby letter of credit which follows various conditions mentioned in the master circular issued by RBI. Some of these are:
- Exposure deemed on this gold loan will be an exposure on guaranteeing bank and involves risk weight.
- Transaction should be the back-to-back basis.
- There should be no liability; neither direct or indirect; to foreign importers of gold
- Banks can calculate their own exposure and compliance according to prudential norms.
There is no change in loans on bullion and these guidelines are subject to Foreign Exchange Management Act (FEMA).