Gold loans without gold? Bizarre but true at BoB

This was the bizarre way in which employees at a clutch of Bank of Baroda (BoB) branches disbursed fake gold loans last year to meet stiff targets, four employees aware of the matter said, breaching regulatory guidelines and potentially risking depositors’ money.

The breaches were primarily at branches with so-called gold loan shoppes, or private enclosures to serve gold loan customers. A BoB statement in August last year showed the bank had 1,238 such enclosures.

Some BoB staffers in southern India executed the scheme in cahoots with friendly customers, the people cited above said. The branch would sanction a gold loan and credit the money to the customer’s account, without any collateral. After a while, the money would be credited back to the bank, like a normal loan repayment. To make sure that the customer does not use up the money, a lien would be created against it. A lien is akin to a block on a specific sum of money on an account. This would help the employees meet their target, without any real loan being made or repaid.

What about the loan’s processing fees and interest? According to the employees cited above, the branch would pay the fees from its own expense account, which is meant for internal expenses.

Interest payments were avoided by another unique way: The bankers allegedly back-dated repayments, so that it would later appear like the loan was repaid the same day. “This back-dating of repayment tricks the system into believing that the loan has been recovered on the day of the disbursement, thus reversing interest charges," said one of the employees cited above. All of them spoke on the condition of anonymity.

BoB currently charges an interest of 9.4% on retail gold loans and provides up to ₹50 lakh against gold jewellery, as per its website.

The violation comes to light months after the Reserve Bank of India (RBI) penalized the state-owned lender for violations related to onboarding of customers on its mobile app.

BoB seems to have got a whiff of the matter during the year. According to an internal bank document in December, an offsite surveillance by its audit division detected anomalies between April and September, pertaining to some gold loans that were opened and closed within three months. Mint has seen a copy of the document.

The bank found that while 4,679 loan accounts were closed within one to three days, 238 were closed on the same day; and 2,512 were opened and closed within the campaign period, referring to campaigns to push specific loan products.

When contacted, a spokesperson for Bank of Baroda said the bank periodically undertakes internal audits across its business verticals.

“One such audit in gold loans where the bank has around 27 lakh (2.7 million) accounts, identified some anomalies in a few gold loan accounts where there was a deviation from the stipulated guidelines," the spokesperson said, adding that it has promptly taken necessary corrective action to ensure compliance with the established guidelines. “The bank has strong internal processes and control mechanisms in place, and is committed to adhering to the highest standards of compliance and governance."

State-owned banks are late entrants to retail gold loans, a sector traditionally dominated by gold loan non-bank financiers. Banks, however, are gradually gaining some foothold. Gold loans against jewellery issued by banks stood at over ₹1 trillion as of December, up 18.6% year-on-year (y-o-y), showed data from RBI. At Bank of Baroda, gold loans stood at ₹3,682 crore in Q3, up 78% y-o-y but constitutes 1.8% of the retail loan book.

Experts said disbursing gold loans without collateral directly contravenes the basic principles of lending against collateral. “If these loans turn bad or the gold ornaments do not exist, the bank risks losing the loan amount, which will have significant financial implications for the bank and its customers," said Ankur Mahindro, managing partner at Kred Jure, a full-service boutique law firm.

Mahindro added that surprise and regular audits act as a deterrent against potential violators who are aware that their actions are likely to be discovered.