RBI flags irregularities in gold loan practices, urges banks and NBFCs to tighten policies

The Reserve Bank of India (RBI) has uncovered numerous irregularities in the process of granting loans against gold ornaments and jewellery, raising concerns over the governance of these loans by banks and non-banking financial companies (NBFCs).

Key issues highlighted by the RBI include:

Improper Use of Third Parties: Involvement of third-party entities such as FinTech companies and Business Correspondents (BCs) in gold loan processes led to several lapses, including gold valuation without the customer’s presence and delays in securely transferring gold to bank branches.

Flawed Gold Valuation: Instances of gold being evaluated without the customer present, often by unqualified third parties, were flagged as problematic.

Lack of Monitoring: Supervised entities were found lacking in proper oversight of loan funds, particularly for non-agricultural loans, and in monitoring whether loan-to-value (LTV) ratios adhered to regulatory limits.

Opaque Auction Practices: In cases of loan defaults, gold auctions were found to lack transparency, with some auctions yielding less than the estimated value of the gold.

Top-up Loan Misuse: Several institutions were issuing top-up loans without fresh gold valuation, using them to pay off old loan installments, raising concerns over the practice of loan recycling.

Short Loan Closure: Some loan accounts were closed in unusually short periods, raising suspicions about their economic benefit.

Violations of Income Tax Act: A high percentage of gold loans issued in cash, violating limits set by the Income Tax Act, 1961, was another irregularity observed by the RBI.

Weak Governance: In many instances, gold loans were repeatedly given to the same individual within a financial year, using the same PAN card. This, along with the practice of extending loans through partial payments, pointed to governance failures.

NPA Mismanagement: Non-performing assets (NPAs) in the gold loan segment were not properly classified. In some cases, new loans were sanctioned or old ones renewed to mask bad loans, a practice known as "evergreening."

The RBI has urged all banks and NBFCs to rectify these deficiencies and thoroughly review their policies to prevent future occurrences. It stressed the need for greater control over third-party involvement and better monitoring mechanisms to ensure compliance with regulations.