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RBI exploring longer tenure gold loans

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The Reserve Bank of India ( RBI) is exploring whether the present gold loan tenure of a 180- day maximum should be extended to a year or more.
The central bank has twice met jewellers and banks active in gold loans on the issue. Those in the trade say they expect a decision very soon.
Jewellers recently put up their case for a higher tenure. “ Gold metal loans are treated equally with cash credit or any working capital loans. Since these (latter) loans are reviewed and limits renewed every year, the same principle should be applicable to gold metal loans,” said Sanjeev Agarawal, co- chairman of the committee on gems and jewellery at the Federation of Indian Chambers of Commerce and Industry.
Banks usually take gold on lease from abroad and lend that to local jewelers -- globally, gold is available on leases of one to three years. And, the cost of alease globally is around one per cent; in India, it depends upon creditworthiness of a jeweller and banks charge interest of 3.5 to 6.5 per cent. Some of the banks getting gold under the governments recent monetisation scheme have also sought a longer tenure for gold loans.
All banks dont agree on this. “ We can monitor the performance of gold metal loans if renewed every six months,” said a banker.
Sources believe RBI could extend the gold term loan limit to a year or two. Or that RBI could fix an upper limit cap and leave it to a bank to decide the tenure. Banks have another issue with a higher tenure loan, as they will lose the extra revenue when gold is quoted at a premium in the local market; they also get a small fee when a gold metal loan is renewed.
A higher tenure would be good news for the jewellery industry, currently in some stress. A longer tenure could also enable them to buy from the spot market at a discount, if available. Industry sources believe RBI might allow banks to buy gold from accredited Indian refiners, with the ongoing process of promoting mandatory hallmarking.
Business Standard New Delhi, 28th May 2016

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