RBI further restricts cash dispensation for gold loan portfolios

The RBI is cracking down on NBFCs giving over Rs 20,000 cash for gold loans, citing tax rules. It reinforces regulatory compliance in a rapidly growing gold loan market.

The Indian central bank, the Reserve Bank of India (RBI), has recently started tightening its rules on cash disbursements for gold loans from NBFCs. Later on, NBFCs involved in gold lending received a warning from the central bank on May 8th to follow the income tax laws that regulate that no more than Rs 20,000 can be paid in cash for any loan.

This is after the RBI in March placed restrictions on the gold loan business of IIFL Finance for the violation of set rules and regulation on issues such as cash disbursal. The regulator also relied on Section 269SS of the Income Tax Act which prohibits any person from receiving cash of more than Rs 20,000 in any form.

“RBI is clamping down on gold loans because of concerns on valuation of gold ornaments, auction mechanisms, KYC standards, AML requirements and other regulatory standards expected from NBFCs,” noted Vivek Iyer, Partner at Grant Thornton Bharat. He encouraged the customers to provide proper KYC documentations to enable them to recover pledged gold once loans are cleared.

The RBI has restricted the maximum loan to value ratio in gold loans up to 75% of the value of the pledged gold as against the jewelry. Adhil Shetty of BankBazaar. com said, “They can pledge gold of Rs 2 lakh but the maximum amount that can be paid out is Rs 20,000 due to the income tax laws. ”

While Indian households possess over 30000 tonnes of gold and only 7% has been pledged so far, the market for gold loans is considered to have a huge scope for expansion. This has probably led to increased RBI scrutiny to enforce the set regulatory measures.

Also Read: RBI intends to replace OTPs with new technology to curb digital frauds | Details inside

Banks sometimes lose out to NBFCs in gold loans due to higher valuations and a simpler procedure. However, borrowers are encouraged to look for the most convenient rates, costs, and procedures and avoid dealing with unlicensed payday loan lenders.