Credit guarantee scheme for pawning advances

The Monetary Board has approved the implementation of a credit guarantee scheme on behalf of the Government for pawning advances granted by licensed banks, to support lending against gold articles.

The Monetary Board has also approved an allocation of Rs. 500 million from the Central Bank as the seed fund to support the credit guarantee scheme.

This scheme is expected to address the significant reduction in pawning advances that had arisen as a result of the decline in gold prices in the international market since early 2013.

As these advances have been predominantly used to fund agriculture and the SME sectors of the economy, the authorities decided that pawning advances need to continue so as to provide funds to support such economic activities.

The present loan to value (LTV) ratio of around 65% and high rates of interest charged on pawning advances had further dampened pawning credit activities.

The new guarantee scheme contemplates the licensed banks contributing a premium of 1% p.a. which would enable them to increase the LTV ratio up to a maximum of 80%, while the interest rate would be capped at 16% p.a. on advances.

As a result of this scheme, borrowers and the lending banks will increase credit flow to the productive sectors of the economy through pawning advances.

This scheme will be operated by the Regional Development Department of the Central Bank on behalf of the Government.