This move from the RBI came after the complaint that was sent to RBI by a few chairmen of various public sector banks. These officials were accusing the gold financiers of not adhering to the norms of KYC.
Muthoot Finance and Manappuram General Finance & Leasing are the largest gold financiers that are listed on the Bombay Stock Exchange, and are the first companies to be on the enquire list. With the speculation of a sharp fall in prices of gold, as it happened for silver, banking institutions are in the fear that, these NBFCs are not adhering to norms which are mandatory for all Financial and NBFCs to follow.
The fear of concentration risk arises when a financial institution has large exposure to a particular asset, in this case gold. The central bank is concerned that any sharp correction in gold prices could adversely impact the operation of these companies as the value of the underlying asset would decline.
“The KYC issue could be at the customer end,” said Ashwin Parekh, partner at consultant Ernst & Young. “Customers could procure gold through unorganized means, which could be used as collateral to get a loan. Here, the customer may not be interested in repaying the loan and also be okay with the gold being forfeited.”
Although with a good movement in the gold prices, people are encouraged to pledge their gold and opt for a gold loan instead of a personal loan, there are some precautions you need to as the customer.
Be aware of the market movements of these assets. Keep a close check on the recent developments taking place in the NBFCs sector, so that you will know what is the amount o the loan you can expect on your gold which you will pledge and what are the interest rates that you will be charged with.