Context:
The RBI has framed explicit directives to support transparency, non-discrimination and implementing instructions in an auction of pledged gold held by scheduled commercial banks/Non Banking Financial Companies/ Primary Cooperative Banks. The process of determining the reserve price becomes the most important affair when gold is used as collateral.
Key Highlights:
Reserving Price Establishment
- The minimum reserve price for the pledged gold must be at least 85% of the average closing price of 22 carat gold for the last 30 working days.
- In case the pledged gold is of a lower carat value, its price is proportionately adjusted before auction. This ensures that the price of the pledged gold is neither undervalued nor over-valued.
- Auction Process & Borrower Participation Perceptibility
- The auction must be carried out by a board-approved auctioneer to ensure transparency and prevent malpractices. Only bidders who comply with Know Your Customer (KYC) regulations are permitted to take part in the auction.
- Borrower’s Right to Participate
- The first borrower who had promised the gold can attend the auction, thereby giving them a chance to recover their property. Now that is a positive pointer.
- Additional Requirements for Lenders Third Party Participation
- Lenders need to have standardized third-party agencies in activities such as sourcing, appraisal, and valuation of the pledged gold to minimize fraud or misvaluation.
- Monitoring of Loan to Value Ratio
- The loan to value ratio must be constantly monitored to avoid excessive lending against gold collateral.
- Risk Management
- The risk weight measures of the borrower should be properly applied to avoid financial instability.
- Internal Controls & Compliance
- Such internal controls should be developed, where the lender outsources handling of gold and auction procedures.
- Regulatory Reporting
- Any corrective action taken by lenders regarding gold auctions must be reported to the RBI’s Senior Supervisory Manager within three months.
- Handling of Auction Proceeds
- If the auction proceeds exceed the outstanding loan amount, the excess amount must be returned to the borrower.
- This will ensure that borrowers would not unnecessarily incur financial losses due to undervaluation and unfair auction practices.
