Reserve Bank of India has directed that loans against gold cannot be considered as priority sector loan by banks. With only one last quarter left for fiscal end, this announcement by the apex bank comes as a big jerk to both private sector lenders as well as non banking finance companies (NBFCs) which are heavily into lending against gold.
The apex bank has given out this directive seeing the high interest in the range of 18 to 24% being charged on them. The RBI feels that the end use of funds generated in this manner may not pertain completely to priority sector purposes.
These loans are actually named 'bridge loans' and are usually given out for short durations like 3 months or so.
Speaking on the impact of this directive on banks, Mr S.K. Mishra, General Manager (priority sector), Indian Overseas Bank, said that private sector lenders would face a bigger impact than the public peers. Since public sector banks have larger rural penetration, it is easier for them to achieve priority sector targets.
The major lenders to be affected by this include ICICI Bank, HDFC Bank, IDBI Bank, Yes Bank, ING Vysya Bank and Axis Bank.