RBI notifies restrictions on bank loans against Gold

May 31, 2013

Taking further measures to curb the expanding Current Account Deficit (CAD) and forex outflow, the RBI has imposed restrictions on banks and NBFCs for providing loans against purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold ETF and units of gold Mutual Funds to discourage demands for gold. Banks have also been directed to ensure that the amount of loan to any customer against gold ornaments, gold jewellery and gold coins (weighing up to 50 grams) should be within the board approved limit.
However , Banks are allowed to grant of advances against specially minted gold coins sold by banks, there is a risk that some of these will weigh much more, thereby circumventing the RBI’s guidelines regarding restrictions on grant of advance against gold bullion.
Current Status: At present, banks are allowed to provide advances against gold ornaments and other jewellery and against specially minted gold coins sold by banks. However, no advances can be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold exchange traded funds and units of gold mutual funds.

Why this measure?
India is one of the largest importers of gold. In the last few years, India has witnessed a sharp rise in the demand as well as in the prices of gold which has in turn led to bigger imports. As the imports are generally paid in dollars/ foreign currency, it has led to massive outflow of foreign exchange reserves leaving a huge CAD. CAD occurs when a country’s total imports of goods, services and transfers are greater than the country’s total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world. Very high CAD is detrimental to the outlook of the whole economy of the country. Government has taken several steps recently, including raising import duty, to curb the inbound shipments of gold. RBI too had put restrictions on banks on gold imports.