RBI Flags Major Lapses in Gold Lending Practices

On September 30, 2024, the Reserve Bank of India (RBI) highlighted problems in gold-lending practices, including issues with using third-party agencies, insufficient checks on borrowers, and poor tracking of how funds are used. The RBI has instructed gold lenders to examine their policies and make necessary improvements within the next 3 months.

Gold loans are loans given in exchange for gold jewellery and ornaments being pledged as collateral.

The Reserve Bank of India (RBI) identified several issues during a recent review of lenders’ compliance with guidelines for gold loans. The regulator found that both the review and inspections of certain supervised entities revealed various irregular practices in this area. 

Key Issues in Gold Lending Practices

Key problems included poor use of third parties for sourcing and assessing loans, valuing gold without the customer being present, inadequate checks on borrowers, and a lack of tracking of how gold loans are utilised. Additionally, there was a lack of transparency during the auction of gold items if a customer defaulted, weak monitoring of the loan-to-value ratio, and incorrect application of risk weights, among other issues.

Compliance and Regulatory Guidelines

The RBI has advised lenders to thoroughly review their policies, processes, and practices related to gold loans to identify gaps, including those mentioned in its guidance, and promptly take corrective actions. Lenders should closely monitor their gold loan portfolios, especially considering the significant growth in some entities. The RBI also emphasised that lenders must ensure proper controls over outsourced activities and third-party service providers.

The RBI stated that lenders must report the actions they take on these issues to the Senior Supervisory Manager (SSM) within 3 months of the circular’s date. The central bank also warned that failure to follow the regulatory guidelines will be taken seriously and could result in supervisory action.

Governor Shaktikanta Das had also pointed out that banks and NBFCs were offering top-up loans on other collateralised loans, like gold loans, but some entities were not properly following rules related to LTV ratios, risk weights, and fund use monitoring. He added that this could lead to funds being used in unproductive or speculative areas.

As part of its advisory to gold lenders, the RBI pointed out several specific issues related to how gold loans are being granted, especially through certain sourcing or distribution channels.

When gold loans are provided in partnership with fintech companies and business correspondents (BCs), the RBI noticed practices like valuing gold without the customer present, BCs themselves handling credit assessment and gold valuation, storing gold with the BC, and delays or unsafe methods of transporting the gold to the branch. Additionally, Know Your Customer (KYC) checks were done through fintechs, and lenders were using internal accounts for both disbursing and repaying the loans.

Additionally, there was no strong system in place for regularly monitoring loan-to-value (LTV) ratios, and some entities were found to have breached regulatory LTV limits. Where system-generated alerts were available, they were not actively used to address these breaches.

The RBI also noted that the application of risk weights did not always comply with prudential regulations, and the use of funds for non-agriculture loans was often not verified. For agriculture gold loans, there was a lack of proper documentation and proof retained.

The review revealed that there was no specific identifier for top-up gold loans in the core banking or loan processing systems of regulated lenders, which often facilitated loan evergreening. Furthermore, no fresh appraisals were conducted when these top-up loans were approved.

Moreover, many loan accounts were closed shortly after being approved, raising questions about the economic reasons behind such actions. The average returns from auctioning gold when a customer defaulted were also lower than the estimated value of the gold, indicating issues in the valuation process.

Governance and Transaction Monitoring Concerns

The RBI also pointed out weak governance and transaction monitoring, noting that many gold loans were granted to the same individual with the same PAN during a financial year. There was also a common practice of rolling over loans at the end of their term, with only partial payments made.

The RBI noted that in some entities, a significant portion of gold loans was disbursed in cash, which often exceeded the cash limits set by the Income Tax Act of 1961. The regulator also highlighted issues like failing to categorise gold loans as non-performing assets (NPAs), rolling over overdue loans by renewing them or issuing new loans, and insufficient monitoring by senior management or the board. Additionally, there were inadequate controls over third-party entities involved in the lending process.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.