Gold loan curbs are because of risk concentration: RBI

RBI Governor Duvvuri Subbarao said the moves to restrict non-banking finance companies (NBFCs) lending against gold was because the RBI was witnessing a "concentration risk". He said the move was not motivated by the business model or activities of certain specific companies.

The concern arose because of systemic instabilities that could potentially arise on account of this concentration risk. "To avoid a concentration risk and systemic instability we have taken these measures," he said.

The RBI, in its 17 April policy, clamped down on banks lending to NBFCs who were funding gold loans. Banks have been asked to reduce their exposure ceiling in a single NBFC having gold loans to the extent of 50 percent or more of its total financial assets from 10 percent to 7.5 percent of the bank's capital funds.

The RBI clamped down on banks lending to NBFCs who were funding gold. loans.

Banks should also have an internal sub-limit on their aggregate exposure to all such NBFCs having gold loans to the extent of 50 percent or more of their total financial assets taken together, RBI said. "The rapid expansion of such NBFCs has led to their increased dependence on public funds, including bank finance," the RBI said in its policy statement.

The central bank has also constituted a working group to examine issues relating to lending by NBFCs against gold, including their sources of funds for such loans and borrowings from the banking system.

RBI Deputy Governor Anand Sinha said the gold loan NBFCs had expanded in a very rapid manner and that led to underlying risks. "The predominant business for these companies is gold and they are relying on just one product. So there is a lot of concentration risk. What we have tried to do is to bring about some stability through our measures and also take care of customer issues. That is why the fair practice code has also been strengthend."

Sinha said there was no concern on banks' direct lending against gold because banks were very diversified.

RBI said in the policy that there were complaints against some NBFCs that they were not scrupulously following proper documentation processes and know your customer (KYC) norms, among others, in order to quickly dispose of the cases relating to gold loans. Gold imports had also increased sharply, causing macroeconomic concerns. The working group set up by RBI will look into all these areas of concerns.

Updated Date: Dec 21, 2014 04:47 AM

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