What changed
RBI observed that banks were extending GMLs relying heavily on stand-by LCs/BGs from other banks without proper credit appraisal, leading to frauds. New guidelines require stand-by LC/BG issuing banks to treat these limits at par with fund-based limits and conduct rigorous credit checks. GML disbursing banks must also do independent appraisals and not rely solely on other banks' guarantees. Both banks must share information and jointly inspect stocks to ensure end-use compliance.
What it means for you
Banks can no longer take a hands-off approach when GMLs are backed by other banks' guarantees; they must independently verify borrower creditworthiness. This increases due diligence costs but reduces fraud risk. Jewellers must be genuine manufacturers, and banks must monitor sales proceeds and stock positions regularly. Non-compliance could lead to regulatory action.
What you must do
- Treat stand-by LC/BG limits as fund-based limits and conduct rigorous credit appraisal for each borrower.
- Ensure GML disbursing banks perform independent credit checks, not relying solely on other banks' guarantees.
- Set up joint or rotational stock inspections and information-sharing mechanisms with the issuing bank.
- Open current accounts for borrowers with consent of the issuing bank to track interest and repayment flows.
- Verify that GML borrowers are genuine gold jewellery manufacturers with good market standing and credit history.
Who it affects
All scheduled commercial banks (excluding RRBs) offering Gold Metal Loans, Banks issuing stand-by LCs or BGs for GMLs, Gold jewellery manufacturers availing GMLs
Can a bank rely solely on another bank's stand-by LC/BG for a GML?
No. The GML disbursing bank must carry out its own independent credit appraisal of the borrower and not depend only on the stand-by LC/BG issued by another bank.
What happens if a jeweller is not a manufacturer of gold jewellery?
GMLs can only be availed by jewellers who are themselves manufacturers of gold jewellery. Non-manufacturers are not eligible under the scheme.
Do both banks need to inspect the gold stock?
Yes. Inspection of stocks, quality checks, and insurance verification should be done jointly or on a rotation basis by both the GML providing bank and the stand-by LC/BG issuing bank.