RBI stiffens gold lending norms for regional rural banks.

The Reserve Bank of India (RBI) on Tuesday put curbs on regional rural banks (RRBs) for lending against gold coins, units of gold exchange traded funds (ETFs) and mutual funds (MFs). Measures are primarily aimed at reducing the demand for gold.

"It is advised that while granting advance against the security of specially minted gold coins sold by banks, RRBs should ensure that the weight of the coin(s) does not exceed 50 grams per customer and 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," RBI said in a notification on Tuesday.

RRBs are currently allowed to grant loans against gold ornaments and jewellery and specially minted gold coins.

Earlier, the RBI had imposed similar restrictions on commercial banks and non-banking finance companies. India is the largest consumer of gold. Consequently, its import volumes are higher, which in turn, it is adding to the widening the current account deficit (CAD), stood at 6.7 percent in October-December quarter, 2012-13.

Higher imports also cause rupee depreciation against the major currencies like US dollar, Great Britain Pound (GBP) and Euro. The government recently took step by raising customs duty to 8 percent to limit gold imports.

The central bank had indicated in the monetary (May, 2013) policy that was a risk that some of these coins would be weighing much more, thereby circumventing the Reserve Bank's guidelines regarding restriction on grant of advance against gold bullion.

RBI has also been receiving references from certain banks asking whether loans against units of gold ETF and gold MF is permitted. Those products are backed by bullion/primary gold.

"It is clarified that the restriction on grant of loan against' gold bullion'....will also be applicable to grant of advance against units of gold ETFs and units of gold MFs. All other instructions issued in this regard will remain unchanged," RBI said.

Gold and silver imports rose nearly 90 percent to USD 8.4 billion in May. Cumulatively, in April-May the import of precious metal stood at USD 15.88 billion.

Source : moneycontrol.com