Gold Loan Bubble - RBI License & Regulations

Gold Loan industry has grown from an unorganised 'rural pawn broker' situation to a Rs 80,000 crore corporate business in India.

Given the scale at which the business of lending money at usurious rates against the collateral of gold is growing, RBI now seems to be worried about the possibility of a gold loan bubble building up in the system and is contemplating tighter regulation for the sector.

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The regulation could be in the form of limits on the loan that a gold loan firm can give as a percentage of the value of mortgage. The RBI may also restrict the maximum interest that a gold loan firm can charge its customers, and also the penalties that gold loan firms can impose.

RBI is concerned about the end use of the money lent out against loan. Unlike other loans where one is buying a house or a car or any other asset, loans against gold is a "cash-for-cash" situation.

However, since much of the loan is collaterised against one's possessions, a sharp drop in gold prices is likely to set off a chain of events that may wreck havoc on the financial structure of gold loan companies.