The Reserve Bank of India (RBI), in its bid to curb investments in gold bars and jewellery, has come out with a draft report suggesting revision in gold loan rules and introduction of new gold-backed products, which would bring down India’s gold import bills.

The working group constituted for studying gold and goal loans by Non-Banking Finance Companies (NBFCs), under the chairmanship of KUB Rao, Advisor, Department of Economics and Policy Research has recommended that banks and NBFCs put the pledged gold to productive use and has also recommended tough guidelines for gold loan companies. The RBI has sought comments on the draft report January 18, 2013. Some key recommendations include having banks design innovative financial instruments to provide real returns to investors; conversion of both rural and urban demand for gold into investment in gold-backed financial instruments through dematerialisation of gold, and introduction of tax incentives on instruments that could impound idle gold.

To prevent the mushrooming of gold loan firms, the panel has recommended that activities of gold loan NBFCs be monitored continuously and the interconnectedness of gold loan NBFCs with the formal financial system be reduced gradually. It has also suggested measures to review the current guidelines pertaining to gold loan NBFCs raising resources through NCDs.

It has also mooted the idea of thoroughly reviewing operational practices followed by gold loans NBFCs. The Working Group was assigned with the task of studying whether large gold imports of India are a threat to external stability. It was asked, among other things, to study the recent trends in gold loans extended by large gold loan NBFCs and see whether there are any systemic stability issues. The report, however, has outlined that there was no systemic implications in the financial system because of gold loan NBFCs. Also the report outlines that there is no risk to gold loan companies because of various factors such as volatility in prices of the gold, sources of funds, capital adequacy and asset quality.

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