What changed
RBI reduced the risk weight on loans up to Rs 1 lakh against gold and silver ornaments from 125% to 50% for all primary urban cooperative banks. This change was announced in the Annual Policy Statement for 2007-08 and took effect immediately from April 30, 2007.
What it means for you
UCBs now need to hold less capital for small gold loans, freeing up capital for other lending. This makes such loans more attractive for banks and more accessible for poorer borrowers, as the lower risk weight reflects the low risk of these secured advances.
What you must do
- Update internal risk-weighting models for gold/silver loans up to Rs 1 lakh to 50% immediately.
- Review capital adequacy calculations to reflect the reduced risk weight for these loans.
- Communicate the change to credit and risk management teams for consistent application.
- Consider expanding small gold loan portfolios given the lower capital charge.
Who it affects
Primary Urban Cooperative Banks (UCBs), Borrowers availing small gold/silver loans up to Rs 1 lakh, Risk management and credit departments of UCBs, Note: The Annual Policy Statement proposed this for all categories of banks, but the circular is specifically for UCBs.
Why did RBI reduce the risk weight on these loans?
RBI noted that loans against gold and silver ornaments up to Rs 1 lakh are low-risk due to adequate margins and easy marketability of collateral, and are commonly used by poorer sections. The reduction aligns capital requirements with actual risk.
Does this apply to all banks or only UCBs?
The circular is addressed to UCBs, but the Annual Policy Statement proposed this reduction for all categories of banks. UCBs must implement it immediately as per this notification.
What was the previous risk weight for these loans?
Previously, these loans attracted a risk weight of 125% as per circular UBD.PCB.Cir.33/09.116.00/04-05 dated January 5, 2005, which had increased it from 100%.