Madras High Court closes plea to regulate gold loans and auction of pledged jewellery

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RBI has formulated detailed guidelines regarding dos and don’ts in respect of gold loan and auction sale of pledged gold from time to time which is binding on the part of the non banking financial institutions. Representational file image. | Photo Credit: Paul Noronha

The Madras High Court has closed a public interest litigation petition seeking a direction to the Union Finance Ministry and the Reserve Bank of India (RBI) to regulate the activities of non-banking financial institutions which lend money by accepting gold jewellery as collateral and end up auctioning those pledged jewels on non payment of dues.

Chief Justice Sushrut Arvind Dharmadhikari and Justice G. Arul Murugan disposed of the case filed by A. Joseph Sagayaraj of Tiruchi after recording the submission of RBI that it had already issued necessary directions besides framing guidelines for adoption of a Fair Practices Code by the financial institutions and that it had also been updating those guidelines periodically.

RBI counsel Chevanan Mohan told the Division Bench, that the central bank was a body corporate constituted under Section 3 of the RBI Act, 1934 to regulate the issue of currency notes and the keeping of reserves with a view to securing monetary stability in the country. The primary object of RBI was to operate the currency and credit system of the country to its advantage.

“RBI acts as banker to the Central government, State governments and other banks in the country. It exercises supervisory and regulatory powers as contemplated under various legislations including the RBI Act, the Banking Regulation Act of 1949, the Foreign Exchange Management Act of 1999, Payment and Settlement Systems Act of 2007 and Credit Information Companies (Regulation) Act of 2005,” he said.

The counsel also stated that the RBI Act was amended in 1963 enabling the central bank to supervise, control and regular acceptance of deposits by nonbanking financial institutions too. The law was amended further in 1983 when acceptance of public deposits by unincorporated bodies, partnership firms and individuals was also brought under the regulation, supervision and control of the central bank.

Mr. Mohan said, a 1997 amendement to the law empowered the RBI to issue guidelines for sound and healthy operation of non-banking financial institutions and ensuring quality of their assets. Exercising powers conferred on it under Section 45L, RBI had issued a circular on September 28, 2006 prescribing broad guidelines on fair practices to be adopted by all such financial institutions.

Lisiting out the follow up action taken by RBI since then, the counsel said, a ‘Master Direction’ was also issued on October 19, 2023. “RBI has formulated detailed guidelines regarding dos and don’ts in respect of gold loan and auction sale of pledged gold from time to time which is binding on the part of the non-banking financial institutions,” he added and urged the court to close the PIL petition.

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