CHAPTER No.

GOLD LOAN SCENARIO IN MUMBAI METRO REGION

6.1 Introduction

6.2 Genesis of Gold Loan Market in India

6.3 Advantages and unique features of Gold Loan to the borrowers

6.4 Charges associated with Gold Loan

6.5 Advise On Gold Loans

6.6 Documents required for Gold loan

6.7 Gold as Secured loan

6.8 Factors Affecting Gold Loan growth in India

6.9 Risks to Borrowers and Lenders

6.10 Lender Banks/NBFC

6.11 KYC Norms

6.12 Gold (Metal) Loans (As per RBI guide lines)

6.13 Bank to Bank provision (As per RBI guide-lines)

6.14 Policies and Procedures (As per the RBI guide lines)

6.15 Fair Practices Code

a Guidelines on Recovery Agents engaged by banks

b Methods followed by Recovery Agents
6.16 Taking possession of property mortgaged/ gold / collateral /
hypothecated to banks

6.17 Use of forum of Lok Adalats

6.18 Role of Technology in the rapid growth of the gold loan market

6.19 Structure of the Players in Gold Loan Market

(a) Organised and Unorganised Gold Loan Market in Mumbai Metro

Region

6.20 Key Drivers of Gold Loan Market

6.21 (a) Trends in Gold Loan Outstanding

(b) Trends in Borrowings Outstanding by Gold Loans ±NBFCS

(c Shares of Banks and NBFCs in the Gold Loan Market

6.22 Gold loan market growth and gold import linkage

6.23 The observations about the Gold loans from NBFCs

Conclusion
61 Introduction
Gold Loan is evident from the name that the Gold Loan is offered against
goldIt is being offered by a number of Banks and Financial Institutions
The Rates of Interest offered on these Loans are comparatively reasonable
It is extremely convenient to apply for Gold Loan and the entire process
can be done in quick timeThese days, many nationalized banks, Private
Banks and other financial companies offer this Loan at attractive rates
Many borrowers are opting for Gold Loan for short period to meet the
requirement of their childrenžs Education, marriage and other financial
problems in the familyAnd some the borrowers also thinks that instead
of keeping the gold idle at home or locked, Loan against gold is the best
option Moreover, with the rise in gold rates the demand from companies
and banks offering Gold Loans has been growing For instance, Muthoot
Finance, one of the leading Gold Loan companies has seen 24 percent
rises in Gold Loan against 17 percent rise in the market value of
gold119 As in India traditionally, the possession of gold has been a
symbol of prosperity and considered a safest form of investment that
provides a hedge against inflationGold has always been a highly coveted
product not only in the form of jewellery, gold bars or bullion, but also has
the ready acceptability as collateral for the lenders because of its high
liquidity character According to an estimate of World Gold Council,
about 10 per cent of worldžs gold is in Indiažs possession Accumulated
Gold stock in India is around 18,000 to 19,000 tonnes as per independent
estimatesDuring 2002-2012, annual gold demand has remained relatively
stable at around between 700 to 900 tonnes despite the rise in prices from
Rs 13,333 to Rs 86,958 per troy ounce as on May 25, 2012120 In India, the
demand for gold has not been adversely impacted by rising prices

119
wwwmuthoot corpncom
120
wwwgoldwatcherblogpotcom

166
62 Genesis of Gold Loan Market in India
¾ In India, it is believed that most of the gold is held by people in rural
areas and in many cases this is the only asset they have in their
possession though in small quantity All the while, rural Indians
know that if his crop fails or his family is sick, he can raise cash in a
moment from the goldsmith or may be pawnbrokers and
moneylenders, because the rural India lags in availing banking
facilities Therefore, even the pattern of saving in India differs for
various Income groups While richer sections diversify their
portfolio according to risk-return equation, the poor rely more on
commodities like gold as well as silver The jewellery bought in
times of prosperity has been pawned or sold for cash in periods of
distress or needOver the years, some portion of this is being used as
collateral for borrowing in the informal market, though estimates are
not availableIt is a common practice in India that gold is pawned,
bought back and re-pawned to manage day-to-day needs of the poor
and middle class The pledging of gold ornaments and other gold
assets to local pawnbrokers and money lenders to avail Loans has
been prevalent in the Indian society over AgesDue to the increased
holding of gold as an asset among large section of people as also the
borrowing practices against gold in the informal sector have
encourAged some Loan companies to provide Loans against the
collateral of used gold jewelleries for years and over a period to
emerge as specialized Gold Loan companiesž
121
¾ Some independent estimates indicate that rural India accounts for
about 65 per cent of total gold stock in the country At times of
emergency, gold ensures a Loan almost instantaneously for the poor
and without any documentation process122Most of the Loans are for
meeting unforeseen contingencies and may be categorized as

121
Working group report-RBI
Churiwal Amit and ShreniAshish August,2012.¶Surveying the Indian Gold Loan Marketpublication
122

Cognizant 20-20.

167
 personal Further, growth in middle Income classes and increase in
the earning capacity of women, a core customer group for gold is
expected to further boost the demand of goldThe demand for gold
has a regional bias with southern Indian states accounting for around
40 per cent of the annual demand, followed by the west 25 per cent,
north 20-25 per cent and east 10-15 per cent Accordingly, even
the Gold Loan market has also developed on the same lines where a
large portion of market is concentrated in southern India India
continues to be one of the largest gold markets in the world The
attraction towards gold in India stems from varied historical and
cultural factors and its perceived safety in times of economic stress
¾ Since 1990, with the repeal of Gold Control Act, Indians have been
allowed to hold gold bars In the year 1993, the provisions of
Foreign Exchange Regulation Act FERA relating to gold were
repealed and imports were allowed by NRIs and since 1997 gold
imports were brought under Open General License All these gave
fillip for the development of not only the gold market but also the
Gold Loans marketWith a view to bring the gold holdings to the
core financial market, several gold based financial products have
been made available to retail consumers in the Indian market from
time to time Recently, Exchange Traded Gold Funds ETF has
also been allowed in the Indian markets, which have received a
positive response from investors These daysž Gold Loan has
become very advantageous for the borrowers because of its
uniqueness than the other Loans

168
 63 Advantage and unique features of Gold Loan to the
borrowers123
There are various advantages and unique features of Gold Loan to
the borroweržs as compared to other Loans as follows
x The unique features of Gold Loan are that even unemployed or
non-working can apply for it Unlike other Loans, Gold Loan
lenders donžt demand for any certificate to show onežs Income and
even no Credit card history is required Thus, even unemployed
and non-working people can also apply for Gold Loan
x The unique feature of Gold Loan is that it requires minimum
documentation during the process Unlike any other unsecured
Loan, the Gold Loan GRHVQ¶W require much papers(
documentations) , only few documents such as ID proof and
address proof is enough to avail of such Loan
x One of the main advantage of Gold Loan is its low interest rates
Usually Loan over gold is provided in the interest of 12-16 per
annum and this is quite low compared to Gold Loans available at
interest rates of 15-26 per annum by Unorganised Loan Lender
The unique feature is the Gold Loan charge low interest rate as
compared to Gold Loans from the Unorganised Loan Lenders
x In rural areas Agricultural Loan against gold is also available for
agriculturist at very nominal Rate of Interest of 7-8, but one
need to give a proof of agricultural document This is the unique
advantage and feature of the Gold Loan is that it provides
Agricultural Loan against gold asset to the farmer This can help
the farmers in rural area to come out of debt trap
x The unique feature of Gold Loan, its convenient form and simple
procedures Gold Loan is the most simple and convenient forms of

123
Churiwal Amit and Shreni Ashish August, 2012.¶Surveying the Indian Gold Loan MarketPublication Cognizant 20-
20

169
 Loan because all one needed to do is pledge onežs own gold with a
bank or finance company and can get up to 80 of the market
value of the gold as a Loan
x The borrower will be given an option to pay only interest during
the entire term and at the end of the tenure one can pay the
complete borrowed amount in a single shot
x In case of Gold Loan processing time is very less Usually banks
take just a few hours to complete the process whereas in case of
NBFCžs Non-Banking, Financial Companies a few minutes are
enough for the same So for immediate financial help this is the
best option
These above features have made the Gold Loan uniqueAs a result,
the Gold Loan has become an attractive option at the time of
financial need The market is expanding in quick process as
compared to other Loans in Mumbai regionBut unlike other Gold
Loan, there is some charges associated with it
64 Charges associated with Gold Loan
x Loan processing charge While some of the service lenders may
even waive these Loan processing charges But some banks do
charge a processing fee, which count may be very low
x Valuation Charge These are the charges to be paid to the
evaluator These charges are also specific to the servicing lender
and those having in-house evaluators do not charge any extra
amount for valuation
x Late payment penalty Most of the service lenders charge a late
payment penalty and this also can vary from one institution to the
other
x Prepayment penalty Most of the service lenders do not charge a
penalty for repayment before the Loan tenure is over But some
may still have this charge in place

170
 It is advisable to check with the Loan lender before taking the
LoanThese charges could change the amount that one may finally
receive
Even though Gold Loan appears to be advantageous to borrow, but
one need to have some advices before opting for it as a Loan.

65 Advise on Gold Loan124

The advices that needs to be followed by borrower is to keep in
mind before opting for the Gold Loan is as follows:
x One can opt for Gold Loans if heshe is confident of returning the
money in time otherwise, one will be penalized and all pledged
gold will come under the control of the bank or finance company
x While opting for a Gold Loan check the Interest Rate in various
banks and private finances If heshe goes for private lender, then
better to opt one who has been in this business for many years
Therefore, now the Gold Loan can become the best option as far as
one is not emotionally linked to own gold ornaments However,
nothing like this can help ones during time of difficulties; it is the
best options for many due to its quick processBut still some basic
documentation is required

66 Documents required for Gold Loan

The Gold Loan requires some basic documentation, the basic
documentations required as follows
x Identity proof such as Passport, Voters ID or driving license
x Address proof such as Electricity bill, Ration card, Telephone bill
etc
x For signature proof one needs to submit own Passport copy,
Driving license or any other documents with own signature

x Two Passport size photographs

124
Compiled from the Interview µDelphi techniques¶

171
 As gold is being pledged in Gold Loan, therefore gold is an important
elementBut to secure the gold given as well as accepted it required above
documentation This gives proper records of the gold holders and its
authentication is required And thus the Gold Loan is considered to be a
secured Loan because of pledging of gold assets at the time of borrowing.

67 Gold as Secured Loan

A secured Loan is a Loan in which the borrower pledges some asset eg
Gold or propertyas collateral for the Loan, which then becomes a secured
debt owed to the creditor who gives the Loan The debt is thus secured
against the collateral in the event that the borrower defaults, the creditor
takes possession of the asset used as collateral and may sell it to regain
some or the entire amount originally lent to the borrower, for example,
foreclosed a portion of the bundle of rights to specified property If the
sale of the collateral does not raise enough money to pay off the debt, the
creditor can often obtain a deficiency judgment against the borrower for
the remaining amount The opposite of secured debtLoan is unsecured
debt, which is not connected to any specific piece of property and instead
the creditor may only satisfy the debt against the borrower rather than the
borrower's collateral and the borrower125There is growth in the borrowers
of Gold LoanThe factors affecting the growth are explained next

125
wwwiobinrates_at_a_glanceaspex

172
68 Factors Affecting Gold Loan growth in India

By virtue of their business model, NBFCs grew rapidly over the last few
years as evidenced by their increase in market share The key
differentiators for the NBFCs as compared to the banks and cooperatives
are

x Quick Loan approvals and disbursals, with minimal documentation

x Multitude of Loan options with higher LTVs

x Greater accessibility due to better penetration

x Non-bankable customers are also served

x Better operating cost structure versa-à-versa banks

x Convenient hours of operation

x FlexibilityProvision of very small and very large Loan amounts

In the process of the Gold Loan-there can be chance of defaulter as lender
gives the Loan on gold pledgedIt means the lenders take the possession of
ERUURZHU¶V gold asset There can the risk in Gold Loan for both Borrowers
DVZHOODV/HQGHUVDVIURPERUURZHU¶VSRLQWRIYLew the lenders takes the
possession of their gold asset. Thus there can be possibility of risk of theft
. And from the Lenders point of the borrower may like to go defaulter. The
risk in gold loan has been explained in detail.

69 Risks to Borrowers and Lenders

It is necessary to know the risk involved in borrowing Gold Loan as well
as lending the Gold LoanThis risk is covered either by better security and
insurance The details regarding the risk of borrowers as well as lenders
in Gold Loan as follows

x Thefts and Robbery

Since lender take possession of the gold asset in a Loan
transaction, if in case of a theft, the lender may not have
sufficient funds to compensate all the borrowers for their loss in its
entirety This is more important for Loan placed in the Organised

173
 sector;( banksNBFCs) usually have better security and insurance
coverage Furthermore, financial packages cannot compensate for
the personal attachment a borrower has with the gold assets which
they had pledgedSo borrower will expect the same gold than the
finance. Thus the lender needs to take necessary precautions

x Increase in Gold Price create a Gold Loan bubble

The increase in gold price over the last few years, which is coupled
with the surge in Gold Loan borrowing can create a gold bubble
which will burst in the event of a significant correction in gold
prices BanksNBFCs with significant exposure to Gold Loans
could face widespread defaults, which can adversely impact the
economy

x The borrower may be more willing to default on the Loan

Moreover, a sharp decline in gold prices increases the original
LTVA lender may require an immediate recovery of any amount
that exceeds the original LTV ratio, but the borrower may be
unable to pay this amount Restructuring of the Loan may be
required in these cases Additionally, if the value of the pledged
asset declines, a borrower may be more willing to default on the
Loan This poses a serious concentration risk to the lender,
especially to the NBFCs that have a high exposure to Gold Loans
and lend at high LTV ratios
The increase interest rate is the important factor to increase the
market share of the Gold Loan as compared to other Loan
especially in comparison to a Personal Loan The low Rate of
Interest has attracted the borrowers Some of the leading
companies and banks offering Gold Loan are ICICI bank, Muthoot
Finance, Manappuram Gold Loan, SBI and HDFC

174
 6.10 Lender BanksNBFC
Table 6.10

Sourcewww.surveycognizant20-20.com ,¶Surveying the Indian Gold Loan Market

126
The above Chart 69 indicates the Rate of Interest provided by lenders
that is Banks NBFCs for the different Loan CategoryThe Loan Category
involves Home Loan, Car Loan, Gold Loan and Personal LoanAs per the
above details if one compares the Rate of Interest on other category Loan
in comparison with a Gold Loan that the Gold Loan provided by the
Banks or NBFCs is on the lower side
Apart from the Rate of Interest, tenure, duration, KYC is also important
and compulsory norms for any other Loans as well as Gold Loan

611 KYC NORMS Know Your Customer

KYC is an acronym for ŸKnow your Customer127, a term used for the
customer identification process It involves making reasonable efforts to
determine true identity and beneficial ownership of accounts, source of
funds, the nature of WKHFXVWRPHU¶VEXVLQHVV, reasonableness of operations
in the account in relation to the customeržs business, etc. which in turn
helps the banks to manage their risks prudentlyThe objective of the KYC

126
Churiwal Amit and ShreniAshish August,2012.¶Surveying the Indian Gold Loan Marketpublication
Cognizant 20-20.

127
KYCnorms RBI2011

175
 guidelines is to prevent banks being used, intentionally or unintentionally
by criminal elements for money laundering
KYC has two components -Identity and AddressWhile identity remains
the same, the address may change and hence the banks are required to
periodically update their recordsAll lenders are required to adhere to the
KYC norms NBFCs allegedly have not strictly followed this regulation
and hence have been under the RBIžs scanner for some-e time nowThe
detail on KYC has been explained in chapter no3 page no (97-100)

612 Gold MetalLoans As per RBI guidelines

Banks nominated to import gold as per extant instructions may extend
Gold Metal Loans128 to domestic jewellery manufacturers, who are not
exporters of jewellery, subject to the condition that any Gold Loan
borrowing or other non-funded commitments taken by them for the
purpose of providing Gold Loans to domestic jewellery manufacturers will
be taken into account for the purpose of the overall ceiling presently 50 
of Tier I capital cf FED Master Circular No52012-13 dated July 2,
2012in respect of aggregate borrowing for non-export purposesThe Gold
Loans extended to exporters of jewellery would continue to be out of the
50ceiling
The Gold MetalLoans provided by banks will be subject to the following
conditions
i The tenor of the Gold Metal Loans, which nominated banks are
permitted to extend to domestic jewellery manufacturers who are not
exporters of jewellery, may be decided by the nominated banks
themselves provided the tenor does not exceed 180 days and the banksž
policy with regard to tenor and monitoring of end use of Gold Loan is
documented in the banksžLoan policy and strictly adhered to by the banks
The above guidelines will be reviewed in the light of experience gained,

128
Gold MetalLoans As per RBI guide lines

176
 and the performance of the banks in regard to monitoring the end-use of
Gold Loans will be an important factor in deciding upon their future
requests for annual renewal of authorization to import gold silver
ii Interest charged to the borrowers should be linked to the
international gold interest rate
iii The gold borrowings will be subject to normal reserve
requirements
iv  The Loan will be subject to capital adequacy and other prudential
requirements
v Banks should ensure end-use of Gold Loans to jeweller
manufacturers and adhere to KYC guidelines
vi Any mismatch arising out of the gold borrowings and lending
should be within the prudential risk limits approved by the
nominated bankžs Board
vii The banks should carefully assess the overall risks of granting
Gold Loans and lay down a detailed lending policy with the
approval of the Board
The Gold Loan is a new emerging Loan in market because of
various provisions and guidelines stipulated by RBI in favor of the
Gold Loan lendersThat is Bank to bank provisions like facilities
to manufacturing jewellers etc This has made the Gold Loan
growing and expanding the market share

613 Bank to Bank's provision As per RBI guidelines129

Presently, nominated banks can extend Gold Metal Loans to
exporters of jewellery who are customers of other scheduled
commercial banks, by accepting stand-by letter of credit or bank
guarantee issued by their bankers in favor of the nominated banks
subject to authorized banks' own norms for lending and other

129
Bank to Bank provision As per RBI guide-lines

177
 conditions stipulated by RBIBanks may also extend the facility to
domestic jewelry manufacturers, subject to the following
conditions
i The stand-by LC BG shall be extended only on behalf of domestic
jewelry manufacturers and shall cover at all times the full value of
the quantity of gold borrowed by these entitiesThe stand-by LC 
BG shall be issued by scheduled commercial banks in favor of a
nominated bank list appended only and not to any other entity
which may otherwise be having permission to import gold
ii The bank issuing the stand-by LC BG only inland letter of credit 
bank guaranteeshould do so only after carrying out proper credit
appraisalThe bank should ensure that adequate margin is available
to it at all times consistent with the volatility of the gold prices
iii The stand-by LC  BG facilities will be denominated in Indian
Rupees and not in foreign currency
iv Stand-by LC  BG issued by the non-nominated banks will be
subject to extant capital adequacy and prudential norms
v The banks issuing stand-by LC  BG should also carefully assess
the overall risks of granting these facilities and lay down a detailed
lending policy with the approval of their Board
vi The nominated banks may continue to extend Gold MetalLoans
to jewelry exporters subject to the following conditions
The exposure assumed by the nominated bank extending the Gold
MetalLoan against the stand-by LC BG of another bank will be
deemed as an expose on the guaranteeing bank and attract
appropriate risk weight as per the extant guidelines
x The transaction should be purely on back-to-back basis, i.e. the
nominated banks should extend Gold Metal Loan directly to the
customer by a non-nominated bank, against the stand-by LC BG
issued by the latter

178
 x Gold Metal Loans should not involve any direct or indirect
liability of the borrowing entity towards foreign suppliers of gold
x The banks may calculate their exposure and compliance with
prudential norms daily by converting into Rupee the gold quantity
by crossing London AM fixing of Gold  US Dollar rate with the
rupee-dollar reference rate announced by RBI
This has expanded the business of gold metalas well as the Gold
Loan marketBut there is no change in existing policy on lending
against bullion

614 Policies and Procedures As per the RBI guidelines

There will be no change in the existing policy on lending against
bullionBanks should recognize the overall risks in extending Gold
Metal Loans as also in extending SBLC  BG Banks should lay
down an appropriate risk management  lending policy in this
regard and comply with the recommendations of the Ghosh
Committee and other internal requirements relating to acceptance
of guarantees to other banks to obviate the possibility of frauds in
this areaThe Policies as follows
Nominated banks are not permitted to enter into any tie up
arrangements for the retailing of gold  gold coins with any other
entity, including non-banking financial companies  co-operative
banks non-nominated bank

179
614 Procedures
As Per the RBI Guide Lines

(ii) Applications for Loans and their processing130

a Loan application forms in respect of all categories of Loans
irrespective of the amount of Loan sought by the borrower should
be comprehensive With a view to bringing in fairness and
transparency, banks are advised that they must transparently
disclose to the borrower all information about fees  charges
payable for processing the Loan application, the amount of fees
refundable if Loan amount is not sanctioned  disbursed, pre-
payment options and charges, if any, penalty for delayed
repayments if any, conversion charges for switching Loan from
fixed to floating rates or vice versa, existence of any interest reset
clause and any other matter which affects the interest of the
borrower Such information should also be displayed on the
website of the banks for all categories of Loan products
Under the vigilance of RBI, it was noticed that some banks levy, in
addition to a processing fee, certain charges which are not initially
disclosed to the borrower It may be mentioned that levying such
charges subsequently without disclosing the same to the borrower
is an unfair practice BanksFIs should ensure that all information
relating to chargesfees for processing are invariably disclosed in
the Loan application formsFurther, the banks must inform all-in-
costž to the customer to enable him to compare the rates charges
with other sources of finance It should also be ensured that such
charges fees are non-discriminatory
b Banks and Financial Institutions should devise a system of
giving acknowledgement for receipt of all Loan applicationsTime
frame within which Loan applications up to Rupees two lakhs will

130
Applications for Loans and their Processing-As per the RBI guide lines

180
be disposed of should also is indicated in acknowledgement of
such applications
c Banks  Financial Institutions should verify the Loan
applications within a reasonable period of timeIf additional details
 documents are required, they should intimate the borrowers
immediately
dIn case of all categories of Loans irrespective of any threshold
limits, including credit card applications, the lenders should
convey in writing, the main reasonreasons which, in the opinion of
the bank after due consideration, have led to rejection of the Loan
applications within stipulated time

iiLoan appraisal and termsconditions

a Lenders should ensure that there is proper assessment of credit

application by borrowersThey should not use margin and security
stipulation as a substitute for due diligence on credit worthiness of
the borrower

b) The lender should convey to the borrower the credit limit

along with the terms and conditions thereof and keep the
borrower's acceptance of these terms and conditions given with his
full knowledge on record

c Terms and conditions and other caveats governing credit

facilities given by banks Financial Institutions arrived at after
negotiation by lending institution and the borrower should be
reduced in writing and duly certified by the authorized officialA
copy of the Loan agreement along with a copy each of all
enclosures quoted in the Loan agreement should be furnished to
the borrowerIt is reiterated that banks should invariably furnish a
copy of the Loan agreement along with a copy each of all

181
 enclosures quoted in the Loan agreement to all the borrowers at the
time of sanction disbursement of Loans
dAs far as possible, the Loan agreement should clearly stipulate

credit facilities that are solely at the discretion of lenders These

may include approval or disallowance of facilities, such as,
drawings beyond the sanctioned limits, honoring cheque issued for
the purpose other than specifically agreed to in the credit sanction,
and disallowing drawing on a borrowable account on its
classification as a non-performing asset or on account of non-
compliance with the terms of sanctionIt may also be specifically
stated that the lender does not have an obligation to meet further
requirements of the borrowers on account of growth in business
etcwithout proper review of credit limits
e In the case of lending under consortium arrangement, the
participating lenders should evolve procedures to complete
appraisal of proposals in the time bound manner to the extent
feasible, and communicate their decisions on financing or
otherwise within a reasonable time

iii Disbursement of Loans including changes in terms and

conditions
Lenders should ensure timely disbursement of Loans sanctioned in
conformity with the terms and conditions governing such sanction
Lenders should give notice of any change in the terms and
conditions including interest rates, service charges etc Lenders
should also ensure that changes in interest rates and charges are
affected only prospectively
ivPost disbursement supervision
a. Post disbursement supervision by lenders, particularly in respect of
Loans up to Rupees two lakh, should be constructive with a view
to taking care of any lender-related genuine difficulty that the
borrower may face
182
b. Before taking a decision to recall  accelerate payment or
performance under the agreement or seeking additional securities,
lenders should give notice to borrowers, as specified in the Loan
agreement or a reasonable period, if no such condition exits in the
Loan agreement
c. Lenders should release all securities on receiving payment of Loan
or realization of Loan subject to any legitimate right or lien for any
other claim lenders may have against borrowersIf such right of set
off is to be exercised, borrowers shall be given notice about the
same with full particulars about the remaining claims and the
documents under which lenders are entitled to retain the securities
till the relevant claim is settledpaid
vGeneral
a. Lenders should restrain from interference in the affairs of the
borrowers except for what is provided in the terms and conditions
of the Loan sanction documents unless new information, not
earlier disclosed by the borrower, has come to the notice of the
lender
b. Lenders must not discriminate on grounds of sex, caste and
religion in the matter of lendingHowever, this does not preclude
lenders from participating in credit-linked schemes framed for
weaker sections of the society
c. In the matter of recovery of Loans, the lenders should not resort to
undue harassment vizpersistently bothering the borrowers at odd
hours, use of muscle power for recovery of Loans, etc
d. In case of receipt of request for transfer of borrowable account,
either from the borrower or from a bankFinancial Institution,
which proposes to take-over the account, the consent or otherwise
ie, objection of the lender, if any, should be conveyed within 21
days from the date of receipt of request

183
 The procedure and process is studied from the Organised Financial
Institution through interviewsžDelphi TechniquesžIt is also important
to study grievance redressed mechanism of lendersThe chapter further
explains the same

615 Fair Practices Code

Banks and Financial Institutions will have the freedom of drafting the
Fair Practices Code, enhancing the scope of the guidelines but in no
way sacrificing the spirit underlying the above guidelines For this
purpose, the Boards of banks and Financial Institutions should lay
down a clear policy
1 The Board of Directors should also lay down the appropriate
grievance redressal mechanism within the organization to resolve
disputes arising in this regard Such a mechanism should ensure
that all disputes arising out of the decisions of lending institutions'
functionaries are heard and disposed of at least at the next higher
level The Board of Directors should also provide for periodical
review of the compliance of the Fair Practices Code and the
functioning of the grievances redressal mechanism at various
levels of controlling officesA consolidated report of such reviews
may be submitted to the Board at regular intervals, as may be
prescribed by it
2 The adoption of the Code, printing of necessary Loan application
forms and circulation thereof among the branches and controlling
offices should also be duly completed The Fair Practices Code,
which may be adopted by banks and Financial Institutions, should
also be put on their website and given wide publicityA copy may
also be forwarded to the Reserve Bank of India
After the disbarment procedure, in due time the borrower may
become defaulterIt is challenge for bank or Financial Institution to

184
 recover Loan amount as per the procedureTherefore, the bank has
recovery Agent
615a Guidelines on Recovery Agents engaged by banks
In view of the rise in the number of disputes and litigations against
banks for engaging recovery Agents in the recent past, it is felt that
the adverse publicity would result in serious reputational risk for
the banking sector as a whole A need has therefore arisen to
review the policy, practice, and procedure involved in the
engagement of recovery Agents by banks in India In this
backdrop, Reserve Bank issued draft guidelines which were placed
on the web-site for comments of all concerned Based on the
feedback received from a wide spectrum of banks  individuals 
organizations, the draft guidelines have been suitably revised and
the final guidelines are issued vide our circular
DBODNoLegBC7509070052007-08 dated April 24, 2008
Banks are advised to take into account the following specific
considerations while engaging recovery Agents
iAgentžin these guidelines would include Agencies engaged by
the bank and the Agentsemployees of the concerned Agencies
ii Banks should have a due diligence process in place for
engagement of recovery Agents, which should be so structured to
cover, among others, individuals involved in the recovery process
The due diligence process should generally conform to the
guidelines issued by RBI on outsourcing of financial services vide
circular DBODNoBP40 2104158 2006-07 dated November 3,
2006 Further, banks should ensure that the Agents engaged by
them in the recovery process carry out verification of the
antecedents of their employees, which may include pre-
employment police verification, as a matter of abundant caution
Banks may decide the periodicity at which re-verification of
antecedents should be resorted to

185
iii To ensure due notice and appropriate authorization, banks
should inform the borrower the details of recovery Agency firms 
companies while forwarding default cases to the recovery Agency
Further, since in some of the cases, the borrower might not have
received the details about the recovery Agency due to refusal non-
availability  avoidance and to ensure identification, it would be
appropriate if the Agent also carries a copy of the notice and the
authorization letter from the bank along with the identity card
issued to him by the bank or the Agency firm companyFurther,
where the recovery Agency is changed by the bank during the
recovery process, in addition to the bank notifying the borrower of
the change, the new Agent should carry the notice and the
authorization letter along with his identity card
iv The notice and the authorization letter should, among other
details, also include the telephone numbers of the relevant
recovery Agency Banks should ensure that there is a tape
recording of the content text of the calls made by recovery Agents
to the customers, and vice-versa Banks may take reasonable
precaution such as intimating the customer that the conversation is
being recorded, etc
vThe up to date details of the recovery Agency firms companies
engaged by banks may also be posted on the bankžs website
vi Where a grievance complaint has been lodged, banks should
not forward cases to recovery Agencies till they have finally
disposed of any grievance  complaint lodged by the concerned
borrowerHowever, where the bank is convinced, with appropriate
proof, that the borrower is continuously making frivolous 
vexatious complaints, it may continue with the recovery
proceedings through the Recovery Agents even if a grievance 
complaint is pending with themIn cases where the subject matter
of the borroweržs dues might be sub judice, banks should exercise

186
 utmost caution, as appropriate, in referring the matter to the
recovery Agencies, depending on the circumstances
viiEach bank should have a mechanism whereby the borrowers'
grievances with regard to the recovery process can be addressedThe
details of the mechanism should also be furnished to the borrower
while advising the details of the recovery Agency as at item iii
above Incentives to Recovery Agents
viiiIt is understood that some banks set very stiff recovery targets
or offer high incentives to recovery Agents These have, in turn,
induced the recovery Agents to use intimidator and questionable
methods for recovery of duesBanks are, therefore, advised to ensure
that the contracts with the recovery Agents do not induce adoption
of uncivilized, unlawful and questionable behavior or recovery
process
After engaging the recovery Agents as per the guideline, the
recovery Agents need to follow the listed methods
615b Methods followed by Recovery Agents
A reference is invited to:131
a Circular DBODLegNoBC104 0907007 2002-03 dated May
5, 2003 regarding Guidelines on Fair Practices Code for Lenders
bCircular DBODNoBP4021041582006-07 dated November
3, 2006 regarding outsourcing of financial services and
c Master Circular DBODFSDBC17 24010112007-08 dated
July 2, 2007 on Credit Card OperationsFurther, a reference is also
invited to paragraph 6 of the Code of Bank's Commitment to
Customers BCSBI Code pertaining to collection of dues Banks

131
Methods followed by Recovery Agents circular DBODlegNo BC104970072002-03 dated May 5
,2003

187
 are advised to strictly adhere to the guidelines  code mentioned
above during the Loan recovery process
Training for Recovery Agents
o Circular DBODNOBP4021041582006-07 dated November 3,
2006 on guidelines on managing risks and code of conduct in
outsourcing of financial services by banks, banks were advised that
they should ensure that, among others, the recovery Agents are
properly trained to handle with care and sensitivity, their
responsibilities, in particular aspects like hours of calling, privacy
of customer information etc
o Reserve Bank has requested the Indian Banksž Association to
formulate, in consultation with Indian Institute of Banking and
Finance IIBF, a certificate course for Direct Recovery Agents
with minimum 100 hours of training Once the above course is
introduced by IIBF, banks should ensure that over a period of one
year all their Recovery Agents undergo the above training and
obtain the certificate from the above instituteFurther, the service
lenders engaged by banks should also employ only such personnel
who have undergone the above training and obtained the certificate
from the IIBF Keeping in view the fact that a large number of
Agents throughout the country may have to be trained, other
institutesbankžs own training colleges may provide the training to
the recovery Agents by having a tie-up arrangement with Indian
Institute of Banking and Finance so that there is uniformity in the
standards of trainingHowever, every Agent will have to pass the
examination conducted by IIBF all over India

o After the proper training to the Recovery Agents and also to follow
uniformity in the standard of training by IIBF There is legal
procedures and provisions on taking possession of mortgage.

188
616 Taking possession of property mortgaged  gold 
collateral  hypothecated to banks
In a recent case which came up before the Honorable Supreme
Court, the Honorable Court observed that we are governed by rule
of law in the country and the recovery of Loans or seizure of
vehicles could be done only through legal means In this
connection it may be mentioned that the Securitization and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 SARFAESI Act and the Security Interest
EnforcementRules, 2002 framed there under have laid down well
defined procedures not only for enforcing security interest but also
for auctioning the movable and immovable property after
enforcing the security interestIt is, therefore, desirable that banks
rely only on legal remedies available under the relevant statutes
while enforcing security interest without intervention of the Courts
Where banks have incorporated a re-possession clause in the
contract with the borrower and rely on such re-possession clause
for enforcing their rights, they should ensure that the re-possession
clause is legally valid, complies with the provisions of the Indian
Contract Act in letter and spirit, and ensure that such repossession
clause is clearly brought to the notice of the borrower at the time of
execution of the contractThe terms and conditions of the contract
should be strictly in terms of the Recovery Policy and should
contain provisions regarding a notice period before taking
possession bcircumstances under which the notice period can be
waived cthe procedure for taking possession of the security da
provision regarding final chance to be given to the borrower for
repayment of Loan before the sale auction of the property ethe
procedure for giving repossession to the borrower and f the
procedure for sale auction of the property

189
617 Use of forum of Lok Adalats
The Honorable Supreme Court also observed that Loans, Personal
Loans, credit card Loans and housing Loans with less than Rupees
ten lakhs132 can be referred to Lok Adalats In this connection,
banks' attention is invited to Circular
DBODNoLegBC210906002 2004-05 dated August 3, 2004
wherein they were advised to use the forum of Lok Adalats
Organised by Civil Courts for recovery of Loans Banks are
encourAged to use the forum of Lok Adalats for recovery of
Personal Loans, credit card Loans or housing Loans with less than
Rupees ten lakh as suggested by the Honorable Supreme Court
Utilization of credit counsellors
o Banks are encourAged to have in place an appropriate mechanism
to utilize the services of the credit counselors for providing
suitable counseling to the borrowers where it becomes aware that
the case of a particular borrower deserves sympathetic
consideration
o Banks should not allow the customers dealing in Selective Credit
Control commodities any credit facilities which would directly or
indirectly defeat the purpose of the directive Advances against
book debtsreceivables and collateral securities like LIC policies,
shares and stocks and real estate should not be considered in favor
of such borrowers
o Although advances against security of or by way of purchase of
demand documentary bills drawn in connection with the
movement of the Selective Credit Control commodities are
exempted, the bank should ensure that the bills offered have arisen
out of actual movement of goods by verifying the relative invoices
as also the receipts issued by transport operators, etc

132
Circular DBODNo LegBC2109060022004-05 dated August 3, 2004

190
o Since bills arising out of sale of Selective Credit Control
commodities should not be discounted except to the extent
specifically permitted in the directives issued
o Clean Telegraphic Transfer Purchase facility may be allowed to a
reasonable extent on certain conditions specified in the directives
o Priority sector advances are also covered byunder Selective Credit
Control directives
o Where credit limits have been sanctioned against the security of
more than one commodity andor any other type of security, the
credit limits against each commodity should be segregated and the
restrictions contained in the directives made applicable to each of
such segregated limit
o Banks are free to determine the Rate of Interest in respect of
advances covered under Selective Credit Control directives
o Banks could grant Loans to borrowers dealing in Selective Credit
Control commodities, provided the term Loans are used for the
purpose of acquiring block assets like plant & machinery and
normal appraisal and other criteria are followed by the banks
o Reserve Bank of India authorizes limits to the Food Corporation of
India and State Governments for procurement of food grains; at
prices fixed by the Government of India, for the Central Pool and
for the distribution of the same under the Public Distribution
System PDSAs the limits are authorized without margin, credit
cannot be drawn against credit sales, book debts, Government
subsidies, etc
o Banks should refer to the directives on Selective Credit Control
measures issued by RBI from time to time
There are various procedures and process to undergo by the
lenders It is necessary for bank to follow to make it convenient,
Bank have adopted various to chronological assistant to fulfill the
large number of the borrowers Therefore, the technology plays
important role in banking system

191
618 Role of Technology in the rapid growth of the Gold
Loan market
To expansion the various activities and functions of the banks, the
bank has large number of customer data The bank has to assured
the smooth working of the banks as well as updated and timely
service to the large number of customerTherefore, bankFinancial
Institution have started through internet as well as new software
to provide information to the customers The information
technology has proved to be progressive to all the banksFinancial
InstitutionAnd using of internet and software in their functioning
have helped bank to expand their business in various segments
133
Information technology has played an increasingly
important role in the rapid growth of the Gold Loan
market
ǵ Technology provides scalability to Gold Loan businesses,
enabling quick roll-out of branches and efficient penetration of the
underserved markets
ǵ Provision of accurate real-time information has led to faster
decision making and reduced turnaround time for Loan disbursals
ǵ Technology has significantly reduced human intervention and
thereby, the approval, disbursal and repayment processes have
become much faster, simpler and more robust
Better adherence to lending regulations KYC, priority lending,
etc, consonance in firm-wide lending activities, efficient tracking
of borrower accounts, process transparency and minimization of
operational costs are some of the major benefits realized through
the use of technology Gold Loan firms use negligible or small-
scale proprietary IT systems These are proving to be inadequate
given gold lendersž strong growth Hence, firms are increasingly

133
Retrieve from µSurveying the Indian Gold Loan market¶ p17

192
 looking to leverage technology for further growth They are
engaging enterprise solution lenders to provide integrated solutions
for Loan origination, servicing and collections

619 Structure of the Players in Gold Loan Market

Borrowing against gold is one of the popular instruments based on
physical pledge of gold and it has been working well with Indian
rural householdžs mindset, which typically views gold as an
important saving instrument that is liquid and can be converted into
cash instantly to meet any urgent needs Traditionally the instant
Gold Loan was borrowed from local jeweller or pawn brokerThis
jeweller has their own procedures and policies which is
Unorganised and informalThe procedures and policies differ from
jeweller to jeweller and from pawn broker to pawn broker
Sometimes procedures and policies it is depend on personal
relation between lender and borrowers
In addition to a growing Organised Gold Loans market, there is a
large long-operated, UnOrganised Gold Loans market which is
believed to be several times the size of Organised Gold Loans
marketThere are no official estimates available on the size of this
market, which is marked with the presence of numerous
pawnbrokers, moneylenders and land lords operating at a local
level These players are quite active in rural areas of India and
provide Loans against jewellery to families in need at interest rates
in excess of 30 percent These operators have a strong
understanding of the local customer base and offer an advantage of
immediate liquidity to customers in need, with extreme flexible
hours of accessibility, without requirements of any elaborate
formalities and documentation However, these players are
completely un-regulated leaving the customers vulnerable to
exploitation at the hands of these moneylenders and pawn-brokers

193
619 a Organised and Unorganised Gold Loan Market in
Mumbai Metro Region
The major players in the Organised Gold Loans market in India are
Commercial banks, Cooperative banks and Gold Loan NBFCs
known as non-deposit taking, systemically important NBFCs The
data on outstanding gold jewellery Loans from the banks and the
major Gold Loan NBFCs is furnished in the Table below6
Following is list of Organised and Unorganised Gold Loan lenders
in Mumbai metro region.134
 1Organised Loan Lender as follows in next page:
Further features comparison of Gold Loan offering as below135

134
Churiwal Amit and Shreni Ashish August, 2012.¶Surveying the Indian Gold Loan MarketPublication Cognizant
20-20
135
Impact Analysis: RBIs Gold Loan regulation for NBFCs ʹ source www.moneycontrol.com,

194
 Table19

ʹ source www.moneycontrol.com

A comparison of interest rates charged by lenders across Loan categories

is shown in Figure 6 The comparison of interest rates shows that Gold
Loans fetch banks higher rates as compared to home Loans and car Loans
Hence, this category is being targeted aggressively by banks However,
NBFCs have a much greater focus on Gold Loans and continue to provide
attractive Loan features which enable them to charge higher rates generate
higher profits and grow rapidly in a singular direction Seizing the vast
untapped potential available for lending against gold, the Organised
players such as NBFCs became more aggressive in the Gold Loans market
and a significant part of the Gold Loans likely to have shifted from the

195
 UnOrganised lenders to the Organised lenders, thus fuelling a strong
growth in the Organised marketFurther, the growth would be even higher
if the customer attitude towards gold pledging becomes more positive
aided by positive Government regulations and aggressive promotion by
banks, finance companies and other formal Financial Institutions South
India continues to account for 80-85 per cent of the Gold Loans market in
IndiaDespite attempts by banks to expand in certain pockets of Northern
and Western India, historically, the market has remained concentrated in
Southern IndiaHowever, this trend is changing gradually, as witnessed in
the strong expansion of branches of the leading Gold Loans providing
NBFCs in Northern and Western India

6.20 Key Drivers of Gold Loan Market136

The prevalence of high level of rural indebtedness, easy availability of
Gold Loans at extreme flexible terms, relative constriction of personal and
retail Loans by banks and changing attitude of customers to avail Gold
Loans have contributed to the sharp growth in the Gold Loans outstanding
It was also realized that there is potential to expand Gold Loans market to
the Northern and Western regions of India, provided the branch network is
expanded and the Loans are available easily with flexible optionsSeveral
large finance companies started expanding their branches in these regions
and the response appears to be favorable The Gold Loans NBFCs and
banks operate in the Gold Loans segment has different approaches and
philosophy which can be seen in the margins and profitability for different
category of lenders Gold Loans NBFCs view Gold Loans as their most
focused business and, therefore, have built their service offerings through
good investment
They have been commanding premium yields and high profitabilityBut,
banks view Gold Loans for agriculture as a safer means to meet their
136
Impact Analysis: RBIs Gold Loan regulation for NBFCs ʹ sourse www.moneycontrol.com, See more at:
http://www.moneycontrol.com/master_your_money/stocks_news_consumption.php?autono=694868#sthash.Pck0CY1o
.dpuf

196
 priority sector lending targets, which typically offer low returns with high
defaultsFurther, even for non-agriculture Gold Loans, their target client is
more Organised segment, given that they are unable to offer the level of
flexibility and rapid disbursals as compared to specialized NBFCs Let us
understand the trends in Gold Loan Outstanding

621a Trends in Gold Loans Outstanding

137
Gold as an asset is liquid and can be readily exchanged for cash even in
the informal marketWith the gold market getting more Organised within
a formal setup, in recent years there has been rapid growth in the Gold
Loans market particularly in Gold Loans disbursed by Banks and NBFCs
Table 61 Both demand and supply side factors have played important
roles in bringing about this growthFrom the demand side, holders of gold
were able to get cash in lieu of their gold in a formal setup and at higher
Loan to value ratios at relatively less Rate of Interest with better terms
when compared with the informal segment From the supply side, banks
and NBFCs were able to disburse Loans against collateral whose value
was stable even in times of financial turmoil
7KHTableLQGLFDWHVAnnual Growth Rate of Gold Loans Outstanding.
The Table 6.21 is as follows:
Table 61
Annual Growth Rate of Gold Loans Outstanding
Per cent

Year Bank Gold Loans NBFC Gold Loans Total Gold Loans

2008-09 542 414 956

2009-10 477 1693 217

2010-11 521 1267 1788

2011-12 776 800 1576

137
Compound Annual Growth Rate Basis CAGR2013

197
Source Working Group calculations based on data from Public Banks and five
major Gold Loans NBFCs
On a Compound Annual Growth Rate Basis CAGR, all segments of the
Gold Loan market have witnessed growth of over 55 per cent between March
2008 and March 2012. The researcher has expressed the trends as it is given by
working group, so the Chart QR¶V are 6.1, 6.2, 6.3, 6.4, 6.5, 6.6 and 6.7 as follows:

An analysis of the annual growth rates of the total Gold Loans disbursed
reveals that the growth rate of Gold Loans disbursed by banks has
witnessed an increasing trend during March 2008 and March 2012
Growth in Gold Loans by NBFCs has fallen over the years but it remains
higher than the growth of Gold Loans disbursed by banksWith the small
base effect waning over the years, the growth of Gold Loans disbursed by
NBFCs has fallen in more recent years However, consumer interest in
Gold Loans by NBFCs still remains high and can be gauged from the fact
that currently it is still growing at a rapid pace of about 80 per centGold
Loans disbursed by banks and NBFCs have moved in tandem and are

198
 highly correlatedTotal Gold Loans outstanding have progressively grown
Chart 61

621 b Trends in Borrowings Outstanding by Gold Loans NBFCs

NBFCs lending against gold, source their funds from the banks as well as
from other non-banks sources But, a sizable portion of their borrowings
account from the banking system Since, the primary business of these
NBFCs is lending against gold, any drastic fall in the gold market leading
to sharp correction in the gold price may potentially have a disturbing
effect on the banking system138
Growth Rate of bank borrowings by NBFCs has fallen in 2011-12 when
compared to the previous years However, bank borrowings by NBFCs
continue to grow at a high pace of 543 per cent In line with the fall in
growth of bank borrowings by NBFCs, growth in non-bank borrowings by
NBFCs and hence growth in total borrowings by NBFCs are also falling
but continue to grow at a fast pace shown in Table 621

138
Compound Annual Growth Rate Basis CAGR2013

199
 Table 622
Annual Growth Rate of Borrowings Outstanding by Gold Loans NBFCs

Per Cent

Borrowings from Borrowings from Total

Year Banks by Gold Loans Other Sources by Borrowings by
NBFCs NBFCs NBFC

2008-09 2249 1018 3267

2009-10 887 394 1281

2010-11 1187 848 2036

2011-12 543 585 1128

SourceWorking Group calculations based on data from Commercial Banks and

major Gold Loans NBFCs
Gold Loans disbursed by NBFCs and total borrowings by NBFCs move in the
same direction to a very large extent NBFCs are highly leveraged Chart 63
This trend needs to be examined further as high leverage could potentially be
destabilizing

200
Total borrowings outstanding by NBFCs and total Gold Loans
outstanding by both banks and NBFCs have moved in the same direction
with very high correlation perhaps indicating that demand for Gold Loans
has been high and lucrative prompting the NBFCs to mobilize more funds
via borrowings Chart 64
Growth in Gold Loans outstanding by NBFCs has been higher than that of
bank borrowings outstanding by NBFCs Chart 65 Similarly, non-bank
borrowings outstanding have grown but at rates lesser than the growth in
Gold Loans outstanding by NBFCs Chart 66 Total borrowings by
NBFCs including from banks and other sources have increased
substantially over the years Chart 67

201
202
The above information is based on working group calculation and it is expressed
as it is in Chart 6.1, 6.2, 6.3, 6.4, 6.5, 6.6 and 6.7.

621 c Shares of Banks and NBFCs in the Gold Loan Market

Gold Loans disbursed by NBFCs have witnessed rapid growth in the
recent past Therefore, there is a general feeling that NBFCs account for
the majority of Gold Loans disbursedHowever, contrary to popular belief,
share of banks in total Gold Loans is highest at 723 per cent at end March
2012 Although banks continue to retain the dominant share in the Gold
Loan market, the share of NBFCs has been steadily increasing over the
yearsShare of Gold Loans disbursed by NBFCs in total Gold Loans was
132 per cent as at end March 2008 more than doubled to 277 per cent as
at end March 2012 Chart 68

203
To sum up, in India, the demand for gold has not been adversely impacted
by rising gold prices in recent years Borrowing by pledging of gold is
popular with the Indian rural households The major players in the
Organised Gold Loans market are commercial banks, cooperative banks
and Gold Loan NBFCsThe prevalence of high level of rural indebtedness,
ease and availability of Gold Loans in flexible terms, relative constriction
of personal and retail Loans by banks have led to the sharp increase in the
Gold Loans outstanding in recent years The total Gold Loan market
witnessed robust growth in recent years Growth in Gold Loans
outstanding by banks and NBFCs continues to be robust with strong
double digit growth Though the Gold Loans disbursed by NBFCs have
witnessed rapid growth in the recent years the share of banks in total Gold
Loans is larger than the share of NBFCsThe growth rate of Gold Loans
disbursed by NBFCs remains higher than the growth of Gold Loans
disbursed by banks, with slight moderation in the latest year Gold Loan
NBFCs source their funds from the banks as well as from other non-banks
sources like NCDs Growth of Gold Loan NBFCsž borrowings from the
banking system and total borrowing by NBFCs, though decelerated in
2011-12 continue to grow at a high pace

204
622 Gold Loan market growth and gold import linkage139
As Gold Loans are issued solely on the basis of gold jewellery as
collateral, the high growth rates observed for Gold Loans in recent years
could be reflecting the emergence of a liquidity motive apart from the
conventional saving motive to acquire goldThe strengthening of liquidity
motive over time could result in increased demand for Gold Loans The
rapid growth in Gold Loans in recent years indicates unleashing the latent
demand for liquidity from a significant proportion of the population who
faced severe borrowing constraints in the pastThis could also be viewed
as an offshoot of the huge rise in gold price along with liberal Loan to
value ratios that existed till the recent past The prospects of gold value
appreciation together, with easy and flexible availability of Gold Loans
increase the demand for gold and thereby to gold imports
It is known that the gold demand in India is influenced strongly by the
future of gold as an attractive investment option The recent Gold Loan
growth phase coincided with the rise in growth of imports of gold, which
grew, despite the rise in gold prices A quiet swing in savings from
financial products to assets, showing a propensity for further growth, is
visible in the Indian economyThere were apprehensions that liberal Loan
to value ratio and consistent rise in gold prices could result in an incentive
for individuals, to consider investment in gold jewellery as an arbitrage
opportunity, by pledging the purchased jewellery and use the proceeds to
buy gold jewellery to take advantage of future appreciation Thus, Gold
Loans and demand for goldjewellerycan theoretically become mutually
reinforcing in the long term However, it is not logical to attach much
relevance to this possibility, as the bulk of the Gold Loans is taken from a
cross section of the population, facing strong borrowing constraintsAlso
the adjustment of making charges of 20 per cent and a margin of 20 to 25
per cent on the value of gold jewellery along with the interest charges of
about 24 per cent on the Loan, makes this possibility unnecessaryIn other

139
RBI-working group ±nbfc-2013

205
 words, the arbitrage opportunity is negligible and may even be negative to
have such mutual reinforcement between Gold Loans and gold imports in
the short run
Banks and Gold Loan NBFCs extending Gold Loans are playing a role in
this financial processBut, there are developments, which are of concern
like very rapid rate of growth of the Gold Loan business of NBFCs, the
speed with which they opened branches, the rate at which they started
raising resources, both from banks and non-bank sources, their high
profitability, complaints made by borrowers against the NBFCs and the
steady decline in their capital funds These developments warranted
regulation and careful monitoring of their operations and activities The
regulatory actions initiated by the Reserve Bank in the recent months will
have to be viewed against this settingCustomer protection has become an
issue in the light of multiple complaints against the Gold Loans NBFCs

6.23 The observations about the Gold Loans from NBFCs 140
The observation on the basis of secondary data about the gold loan from
NBFCs as follows:
x No immediate systemic implications in terms of domestic financial
stability from the Gold Loans NBFCs141
The financial performance of the Gold Loans NBFCs and the current level
of their borrowings from the banking system are not of a significant
concernThere appears to be no immediate systemic implications in terms
of domestic financial stability due to the interconnectedness of Gold
Loans NBFCs and the banking system However, if the present rate of
growth in their bank borrowings is unchecked, Gold Loans may become a
significant portion of the portfolio of banks in the medium term142There

140
Compiled from the primary data ( Delphi technique) as well as secondary data
141
RBI-working group ±nbfc-2013
142
Report of the Working GrouSWR6WXG\µWKH,VVXHV5HODWHGWR*ROG,PSRUWVDQGGold LoanV1%)&VLQ,QGLD¶5HVHUYH
Bank of India February 2013

206
 were also instances of regulatory violations in the manner in which
resources are raised through debentures by the Gold Loan NBFCs
x The impact of recent regulatory measures on Gold Loans NBFCs is
clearly visible
The recent regulatory measures initiated by the Reserve Bank are in the
right direction and is expected to make the Gold Loans NBFCs robust and
reduce the regulatory gaps between banks and Gold Loans NBFCs As
Gold Loans NBFCs aspire for a level playing field with banks over the
medium term, they should be prepared for equal regulatory and
supervisory treatment and strengthening of their capital buffersThe study
recognizes the fact that there is a tradeoff between the goal to monetize as
much idle gold in the economy as possible and the need to have a
restrictive Loan to value ratiožimposed on Gold Loan NBFCsTherefore,
once the business levels of these Gold Loans NBFCs come to a level as
considered appropriatežby the Reserve Bank, there appears to be a case for
revisiting the prescribed Loan to value ratiožof 60 per cent
x Going forward, customer protection should be the focus of the Gold Loans
NBFCs
Going by the nature of complaints against Gold Loans NBFCs, like excessive
interest rate related disputes, charges of improper documentation and auction
related issues, there is a need to monitor the operational practices of the Gold
Loans NBFCs carefully and continuouslyThere is also a continued need for
strengthening the regulations and supervision to make them robust over
medium and long haul and also make them highly customer-oriented The
major Gold Loan companies need to follow appropriate documentation,
modify auction procedures and also go for a self-imposed interest rate
rationalizationIn sum, the operational practices followed by the NBFCs need
an overhaulThe Gold Loan industry can play a proactive role in ensuring the
scrupulous implementation of the prescribed fair practices code in all aspects
of the functioning of Gold Loans NBFCs

207
Conclusion
For borrowers, Gold Loans have emerged as one of the best means of raising
quick, short-term capital For lenders, Gold Loans are more advantageous
compared to home and other Loans This is because of the Gold Loan shorter
tenures, lower processing time and cost, and greater returns due to higher interest
ratesThese factors of processing have led to the appreciation in value of gold, as
well as an explosion in the Gold Loan marketSince 2008 the Organised sector
has challenged the large Unorganised Gold Loan market dominated by
pawnbrokers and moneylenders, with NBFCs leading the pack due to simpler
approval and disbursal processes, flexible products and better accessibilityThese
factors have led to the expansion of the Gold Loan market in organized formThe
next chapter includes the borroweržs Consumeržs Profile and Consumer
Behaviour models

208