INDIA'S central bank has told the country's banks they should reduce their exposure to gold lending companies.
In its Annual Monetary Policy Statement for 2012-13, the Reserve Bank of India expressed concern Tuesday that banks may be overexposed to non-banking financial companies (NBFCs) that specialize in lending against gold as collateral.
"The rapid expansion of such NBFCs has led to their increased dependence on public funds, including bank finance," said the statement by RBI governor D. Subbarao.
Subbarao added that banks should reduce their regulatory exposure to any NBFC where loans against gold make up 50% or more of that firm's assets, cutting their exposure to such a firm from the current 10% to 7.5% of bank capital funds – although there is a proviso for this to rise to 12.5% in cases where funds are lent on by an NBFC to the infrastructure sector.
In addition, Subbarao said, "banks should have an internal sub-limit on their aggregate exposure to all such NBFCs, having gold loans to the extent of 50% or more of their total financial assets, taken together."
The RBI says it plans to set up a working group to look into gold loan companies, citing complaints that some NBFCs are not following proper Know Your Customer (KYC) procedures, as well as the wider impact of gold on India's economy.
"Gold imports have...increased sharply, raising macroeconomic concerns," Subbarao said.
The statement notes that Indian authorities have already taken a number of steps in response to concerns about the gold lending industry. These include capping the loan-to-value ratio at 60% against gold jewelry, as well as prohibiting NBFCs from lending against investment-grade Gold Bullion and Gold Coins.
In addition, finance minister Pranab Mukherjee last month announced a doubling of gold import duties in his Union Budget – a move that was followed by gold jewelers going on strike for three weeks.
India is one of a number of countries where strong gold demand is largely met by imports, and where authorities have recently introduced policies that affect the gold industry. Two others are Turkey and Vietnam. One possible difference, however, is that while Indian policies appear to aim at reducing banks' exposure to gold, Turkey's central bank is arguably encouraging Turkish banks to raise their exposure as a way of adding liquid assets to their balance sheets.
Vietnam meantime, where central bankers have been encouraging the 'mobilization' of gold – for example through gold certificates – recently passed Decree 24/2012/ND-CP, which brings together various draft decrees circulated last year and appears designed to tighten government control of the gold industry.
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