RBI urges gold loan firms to monitor portfolios following lapses
Sep 30, 2024
Synopsis
The Reserve Bank of India has flagged concerns regarding gold loans issued through fintech partnerships and business correspondents. Key issues include improper gold valuation, inadequate KYC compliance, and unsafe gold storage and transport. The RBI mandates all supervised entities to review their practices and report corrective actions within three months.
In a circular issued on Monday, the Reserve Bank of India raised concerns about practices in gold loans provided through partnerships with fintech companies and business correspondents.
Issues that the central bank highlighted in the notification included gold valuation conducted without customers present, credit appraisals done by the business correspondents themselves, gold stored in their custody, inadequate and unsafe transportation of gold to branches, KYC compliance managed by fintechs, and the use of internal accounts for loan disbursement and repayment.
Gold loans by banks and non-bank lenders are set to breach the Rs 10 lakh crore milestone by the end of FY25, a report said on Wednesday. The quantum of such loans will cross Rs 15 lakh crore by the end of FY27, a report by Icra Ratings said.
RBI direction to SEs
The Reserve Bank advised all supervised entities (SE) to conduct a thorough review of their gold loan policies, processes, and practices to identify gaps and implement timely remedial measures with immediate effect. The circular further advised close monitoring of the gold loan portfolios, especially in light of significant growth in certain sectors, and ensuring that adequate controls are in place for outsourced activities and third-party service providers.
Moreover, RBI noted that SEs must report their actions regarding these issues to the Senior Supervisory Manager (SSM) of the Reserve Bank within three months; and that noncompliance with these regulatory guidelines will be taken seriously and may result in supervisory action from the RBI.
The shortcoming was noticed in a review of the adherence to prudential guidelines and practices related to loans against gold ornaments and jewellery by SEs carried out by the RBI. This review, along with findings from onsite examinations of select SEs, has revealed several irregular practices in this sector.
Major issues highlighted by RBI
The major deficiencies identified include several critical issues such as shortcomings in the use of third parties for sourcing and appraising loans. Secondly, gold is often valued without the customer being present, which raises concerns about fairness and accuracy. Additionally, there is inadequate due diligence and a lack of monitoring regarding the end use of gold loans.
The review further observed that transparency is lacking during the auction of gold ornaments and jewellery when customers default. Furthermore, there are weaknesses in monitoring the loan-to-value (LTV) ratios, as well as incorrect application of risk weights, among other issues, according to the results of the central bank's assessment.
The growth in the NBFCs gold loan book is largely driven by the gold prices as the branch additions, the Icra report said, adding that the tonnage of gold jewellery held as collateral grew at the modest pace of 3-4 per cent against an 18 per cent growth in the loan book during FY2020-FY2024 for the large players.
[The Economic Times]
