RBI finds irregular practices in grant of gold loans; asks lenders to review policies

Some irregularities 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; and lack of transparency during auction of gold ornaments and jewellery on default by the customer. The RBI in its review also found weaknesses in monitoring of LTV (loan-to-value ratio) and incorrect application of risk-weights.

The RBI said that in gold 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, delayed and insecure mode of transportation of gold to the branch and KYC (Know Your Customer) compliance being done through Fintechs.

The RBI found that in some of the gold loan players, the share of gold loans disbursed in cash to total gold loans disbursed was high and the statutory limit specified under the Income Tax Act, 1961 on cash mode of disbursal was not adhered to in many cases.

“Many loan accounts were closed within a short time from sanction, i.e. within a few days raising doubts over the economic rationale for such action,” the RBI said.

Even the end use of funds was not verified for non-agriculture loans, it said.

The RBI said that the gold loan portfolio should be closely monitored, especially in the light of significant growth in the portfolio in certain SEs. It should also be ensured that adequate controls are in place over outsourced activities and third-party service providers, it said.

The RBI also asked gold loan financiers to inform it about the action taken by them to remove the shortcomings within three months. It was warned of supervisory action in case of non-compliance of the regulatory guidelines.