The Reserve Bank of India (RBI) has flagged irregular practices by banks and NBFCs in grant of loans against gold ornaments and jewellery. It further asked them to identify gaps and initiate appropriate remedial measures in a timebound manner.
RBI said it has carried out a review of the adherence to prudential guidelines as well as practices being followed by SEs with regard to loans against pledge of gold ornaments and jewellery.
Major deficiencies observed by the RBI:
In its circular, the RBI highlighted the major deficiencies observed in grant of loans against gold ornaments and jewellery.
These included shortcomings in 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.
RBi also highlighted discrepancies like weaknesses in monitoring of LTV; and incorrect application of risk-weights, etc.
Some of the concerning remarks raised by the RBI are on the valuation of gold, high number of gold loans being granted to the same individual, low realisation of gold on default by the customer from auction among others.
It is to be highlighted that last week, ICRA has observed growth in the gold loan book of NBFCs, and said it is largely driven by the gold prices as the branch additions and the tonnage of gold jewellery held as collateral grew at the modest pace of 3-4% vis-à-vis the 18% growth in the loan book during FY2020-FY2024 for the larger players.
Also Read: Gold jewellery held as collateral leads to spike in gold loan book of NBFCs
Discrepancies in valuation of gold:
The apex bank highlighted that in loans granted through partnership with Fintech entities/ business correspondents (BC), practices such as valuation of gold being carried out in the absence of customer, credit appraisal and valuation done by the BC itself, gold stored in the custody of BC, delayed and insecure mode of transportation of gold to the branch, KYC compliance being done through Fintechs, use of internal accounts for disbursement as well as repayment of loans were observed.
No fresh appraisal:
It further highlighted lack of a specific identifier for top up gold loans in the Core Banking System / Loan Processing System with the SEs mostly to facilitate evergreening of loans. Also, no fresh appraisal was done at the time of sanctioning these top up loans.
High number of gold loans on same PAN:
RBI pointed out the weak governance and transaction monitoring issues in the gold loan business.
It said that the instances of unusually high number of gold loans being granted to the same individual with the same PAN during a financial year.
Non-categorisation as NPA:
RBI also flagged instances of non-categorisation of gold loans as NPA in the system.
It also observed evergreening of these loans by renewing overdue loans/issuing a fresh loan, inadequate monitoring by Senior Management/ Board and inadequate or absence of controls over third-party entities.
