RBI flags deficiencies in gold loan practices, asks lenders to take remedial measures in 3 months

Mumbai: The Reserve Bank of India (RBI) on Monday flagged deficiencies in gold-lending practices with respect to use of third party agencies, inadequate due diligence and monitoring of end use of funds. The regulator asked gold lenders to review their policies and practices and take corrective measures within three months.

Gold loans refer to loans granted against a pledge of gold ornaments and jewellery.

The deficiencies were observed during a recent review of lenders’ adherence to prudential guidelines as well as practices with regard to gold loans.

“The review, as well as the findings of the onsite examination of select SEs (supervised entities) by RBI, indicate several irregular practices in this activity,” the regulator notified.

Major deficiencies include shortcomings in the use of third parties for sourcing and appraisal of loans, valuation of gold without the presence of the customer, inadequate due diligence and lack of end use monitoring of gold loans, lack of transparency during auction of gold ornaments and jewellery on default by the customer, weaknesses in monitoring of loan-to-value, and incorrect application of risk-weights, among others.

Accordingly, lenders have been advised to “comprehensively review their policies, processes and practices on gold loans to identify gaps, including those highlighted in this advice, and initiate appropriate remedial measures in a timebound manner.”

The gold loan portfolios should be closely monitored, especially in the light of significant growth in the portfolios in certain entities, RBI said, adding that entities should also ensure that adequate controls are in place over outsourced activities and third-party service providers.

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“Action taken with regard to the above may be informed to the Senior Supervisory Manager (SSM) of Reserve Bank within three months of the date of this circular,” the central bank said, adding that non-compliance with regulatory guidelines will be “viewed seriously and will attract, among other things, supervisory action” by RBI.

The warning on gold loan comes after the RBI, in August 2024, highlighted issues with home equity or top-up housing loans such as non-adherence to LTV ratios and lack of end-use monitoring, similar to those flagged for gold loans, and had asked lenders to take corrective action. Home equity loans or top-up loans are additional loans taken on existing home loans or personal borrowings.

“Banks and NBFCs have also been offering top-up (home) loans on other collateralised loans like gold loans. It is noticed that the regulatory prescriptions relating to loan to value (LTV) ratio, risk weights and monitoring of end use of funds are not being strictly adhered to by certain entities,” Governor Shaktikanta Das had then said, adding that such loans may lead to funds being deployed in unproductive segments or for speculative purposes.

Gold loans deficiencies

As a part of its advisory to gold lenders, RBI highlighted several specific cases of irregularities or deficiencies with respect to gold loans being granted, including based on specific sourcing or distribution channels.

In the case of gold loans being given through partnership with fintechs and business correspondents (BCs), RBI said it observed practices such as valuation of gold are being carried out in the absence of customer, credit appraisal and valuations being done by the BC itself, gold being stored in the custody of BC, delays and insecure modes of transportation for gold to reach the branch, KYC compliance being done through fintechs, and lenders using internal accounts for disbursement as well as repayment of loans.

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Further, there was lack of a robust system for periodical LTV (loan-to-value) monitoring with instances of breach of regulatory LTV ceilings observed in some entities. System generated alerts, where available, were not pursued actively to address the breach in LTV ceiling.

In other instances, the application of risk weights was at variance with the prudential regulations, the regulator said, adding that the end use of funds was also usually not verified for non-agriculture loans and there was lack of proof or proper documentation obtained and retained in respect of agriculture gold loans.

The review also threw up lack of a specific identifier for top up gold loans in the core banking system/loan processing system with regulated lenders, which was mostly to facilitate evergreening of loans, the central bank said, adding that no fresh appraisals were done at the time of sanctioning these top-up loans.

In addition, many loan accounts were closed within a short time or a few days from sanction, raising doubts over the economic rationale for such action. Average realization from auction of gold on default by the customer was also lower than the estimated value of gold in certain cases, reflecting among other things, gaps in valuation process.

RBI also flagged weak governance and transaction monitoring saying that there were an unusually high number of gold loans being granted to the same individual with the same PAN during a financial year, and there is an ongoing practice of rolling over loans at the end of tenor, with only part payment.

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“Share of gold loans disbursed in cash to total gold loans disbursed was high in some entities and the statutory limit specified under the Income Tax Act, 1961 on cash mode of disbursal was not adhered to in many cases,” RBI said, also pointing out issues such as non-categorization of gold loans as non-performing assets (NPAs), evergreening by renewing overdue loans/issuing a fresh loan, inadequate monitoring by Senior Management/ Board and inadequate or absence of controls over third-party entities.