RBI asks lenders to address 'irregularities' in gold loans in 3 months

Action taken by lenders have to be informed to the senior supervisory manager (SSM) of the regulator

A Reserve Bank of India (RBI) circular has pointed out irregularities in granting loans against gold ornaments and jewellery. Following a review, the regulator identified shortcomings in loan sourcing and appraisal, valuation, due diligence, end-use monitoring, auction transparency, Loan-to-Value (LTV) ratio monitoring, and the application of risk weights.

 

“All supervised entities (SEs) are 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 time bound manner,” said the central bank.

 

“We fully align with the RBI’s goal of fostering a responsible and transparent financial ecosystem. The Association of Gold Loan Companies and its member companies are committed to ensuring that the highest standards of governance and compliance are maintained in the gold loan sector. The traditional gold loan companies have already commenced a thorough review of their policies and will continue to work closely with the RBI to address any potential gaps,” said Thomas George Muthoot, vice-chairman and secretary of Association of Gold Loan Companies.

 

 

Deficiencies RBI observed:

 

In partnerships with fintech entities or Business Correspondents (BCs), practices such as gold valuation being conducted without the customer's presence, credit appraisal and valuation being handled by the BC, gold being stored in the BC's custody, delayed and insecure transportation of gold to branches, KYC compliance being managed through Fintechs, and the use of internal accounts for disbursement and repayment of loans were noted.

 

A lack of a robust system for periodic Loan-to-Value (LTV) monitoring was observed, with instances of breaches in regulatory LTV ceilings. Even where system-generated alerts were available, they were not actively followed up to address LTV violations.

 

Discrepancies in the application of risk weights, contrary to prudential regulations, were found.

 

For non-agricultural loans, the end-use of funds was not usually verified, and there was insufficient documentation for agricultural gold loans.

 

The absence of specific identifiers for top-up gold loans in the Core Banking System or Loan Processing System facilitated the evergreening of loans, with no fresh appraisal conducted at the time of sanctioning these top-up loans.

 

Many loan accounts were closed within a few days of sanction, raising concerns about the economic rationale behind these actions, as per RBI guidelines.

 

In certain SEs, the average realisation from the auction of gold on customer default was lower than the estimated value of the gold, highlighting gaps in the valuation process.

 

In some entities, the proportion of gold loans disbursed in cash was high, and in many cases, the statutory limit on cash disbursement under the Income Tax Act, 1961, was not adhered to.

 

Governance and transaction monitoring were weak, with instances of an unusually high number of gold loans being granted to the same individual using the same PAN in a financial year, per RBI guidelines.

 

There was a common practice of rolling over loans at the end of their term, with only partial payments being made.

 

Inadequate monitoring by senior management and the board was observed, along with the failure to categorise overdue gold loans as NPAs (non-performing assets), evergreen overdue loans, issue fresh loans, and maintain adequate controls over third-party entities.