Gold loans: Unequal rules could backfire

The Reserve Bank of India (RBI) has issued draft guidelines on gold loans and sought comments.

- PRASANNA TANTRI

The Reserve Bank of India (RBI) has issued draft guidelines on gold loans and sought comments. Given the overall size and speed of growth of gold loans (76 per cent growth in the last year), the regulator paying attention to this segment is welcome. In this article, I argue that while the RBI's efforts to standardise loan terms and prevent evergreening are in the right direction, treating banks more favourably than non-banks is likely to be counterproductive.

To appreciate the spirit of RBI guidelines, it is important to understand the profile of typical gold loan borrowers. These are likely to be new-to-credit, with little understanding of business, finance, or their rights under a contract. Such borrowers are vulnerable to manipulation by sophisticated lenders. In this regard, the first set of proposed measures that aim to standardise lending, valuation, storage, and auctioning are timely and relevant. For instance, a proposed regulation requires the lenders to return the gold held as security to the borrowers within a period of seven days after loan repayment. Another proposal in the same spirit requires the lender to pay a fine of ₹5,000 per day for any delay in returning gold.