RBI Scrutinizes Gold Loan Practices
On Monday, the Reserve Bank of India (RBI) directed banks and non-banking financial companies (NBFCs) offering gold loans to reevaluate their policies and practices. This comes in light of significant growth in gold loan portfolios, prompting the RBI to demand closer monitoring and identification of potential gaps in their operations.
In a recent circular, the RBI emphasized the need for robust controls over outsourced activities and third-party service providers. Lenders must report any corrective actions taken within three months, with a stern warning that non-compliance could lead to serious supervisory consequences.
The RBI’s review uncovered several irregularities among gold loan financiers, such as improper risk weight applications, weak monitoring of loan-to-value (LTV) ratios, and a lack of transparency during auctions of defaulted gold items. Moreover, many lenders failed to perform adequate due diligence and monitoring of loan end-uses, raising concerns about the integrity of their lending practices.
Significantly, some lenders were found rolling over loans at the end of their term with only partial payments, avoiding proper categorization of non-performing assets (NPAs), and inadequately monitoring transactions. Alarmingly, there were high instances of multiple loans being granted to individuals with the same PAN, and many loans were closed shortly after approval, prompting questions about their economic rationale.
The RBI also noted that certain lenders were disbursing a large share of gold loans in cash, often exceeding the statutory limits set by the Income Tax Act, which adds to the concerns regarding financial transparency.
In March, the RBI had placed restrictions on IIFL Finance, a major player in the gold loan market, due to issues such as non-compliance with purity and weight standards, deviations from LTV ratios, and a lack of transparency in customer charges. These restrictions were lifted earlier this month after the company addressed the supervisory concerns.
As the gold loan sector continues to grow, the RBI’s call for stricter oversight signals its commitment to maintaining financial integrity and protecting consumers in this booming market.
Leave a Reply