The Reserve Bank of India (RBI) has recently flagged significant irregularities in the processing of loans against gold jewellery by supervised entities, including banks and non-banking financial companies (NBFCs). The RBI’s review of gold loan practices has uncovered several deficiencies, including:
RBI’s Call to Action
The RBI has urged all supervised entities to conduct a thorough review of their gold loan policies and practices, and to identify gaps and implement remedial measures within a specified time frame. The RBI has also emphasized the importance of adequate controls, especially over outsourced activities and third-party service providers, to mitigate risks associated with gold loans.
Consequences of Non-Compliance
Failure to comply with these regulatory guidelines could lead to serious supervisory action by the RBI. The RBI has asked gold loan providers to submit an action report to the senior supervisory manager of the central bank within three months.
Gold Loan Market
The gold loan market has seen significant growth in recent months, with gold loan outstanding surging 40% to ₹1.32 lakh crore as of July end, compared to ₹95,344 crore in the year-ago period. The RBI’s review of gold loan practices is aimed at ensuring that the growth of the gold loan market is sustainable and that the interests of customers are protected.
Regulatory Guidelines
The RBI has advised lenders to thoroughly review their policies, processes, and practices related to gold loans, and to ensure that they are in compliance with regulatory guidelines. The RBI has also emphasized the importance of proper controls over outsourced activities and third-party service providers.
Governance and Transaction Monitoring Concerns
The RBI has 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.
Key Findings
- Lack of customer involvement in the valuation process, with many entities valuing gold in the customer’s absence.
- Inadequate due diligence, including a lack of monitoring regarding the end use of gold loans.
- Weak governance structures, including instances of unusually high numbers of loans granted to the same individual.
- Deficiencies in the auction process for gold ornaments and jewellery in case of defaults.
- High cash disbursal rates, with some entities disbursing a significant share of gold loans in cash, often ignoring statutory limits.
Conclusion
The RBI’s review of gold loan practices highlights the need for supervised entities to strengthen their governance structures, improve their due diligence processes, and ensure compliance with regulatory guidelines. The RBI’s call to action is a timely reminder of the importance of responsible lending practices in the gold loan market.
