RBI directs gold loan providers to review policies and practices

The Reserve Bank of India (RBI) on Monday directed banks and non-banking financial companies (NBFCs) offering gold loans to thoroughly review their policies, processes, and practices to identify any gaps.

The central bank also told them to closely monitoring their gold loan portfolios amid significant growth observed in this segment vis-à-vis some lenders.

Additionally, the RBI, through a circular, instructed these lenders to ensure adequate controls over outsourced activities and third-party service providers.

Any actions taken by the lenders in this regard have to be informed to the senior supervisory manager (SSM) of the RBI within three months of the date of the circular, the central bank said, adding that non-compliance with regulatory guidelines in this regard will be viewed seriously and will attract, among other things, supervisory action.

This comes as the RBI, following a review of adherence of prudential regulations being followed by gold loan financiers, found several irregular practices, including incorrect application of risk weights, weakness in monitoring of loan-to-value (LTV) ratio, and lack of transparency during auction of gold ornaments and jewellery on default by the customer, among others.

Further, the central bank discovered that these lenders were inadequately conducting due diligence, lacking end-use monitoring of gold loans, and exhibiting a lack of transparency during auctions of gold ornaments and jewellery following customer defaults, as well as shortcomings in their use of third parties for sourcing and appraising loans.

Following its review, the RBI found that certain lenders were following a practice of rolling over loans at the end of tenor, with only part payment.

Additionally, they found non-categorisation of gold loans as non-performing assets (NPA) in the system, evergreening by renewing overdue loans or issuing a fresh loan, inadequate monitoring by senior management/board, and inadequate or absence of controls over third-party entities.

Further, the RBI said that in select lenders, they found weak governance and transaction monitoring as there were unusually high numbers of gold loans being granted to the same individual with the same PAN during a financial year.

Also, the central bank observed that the share of gold loans disbursed in cash was high in some entities and the statutory limit specified under the Income Tax Act, 1961 on cash mode of disbursal was not adhered to in many cases.

Meanwhile, the RBI also found that many loan accounts were closed within a short time of sanction, i.e. within a few days, raising doubts over the economic rationale for such action.

The RBI further found that average realisation from auction of gold on default by the customer was lower in certain lenders than the estimated value of gold, reflecting among other things gaps in the valuation process.

There was a lack of a specific identifier for topup gold loans in the core banking system/loan processing system of the lenders, mostly to facilitate evergreening of loans.

Also, no fresh appraisal was done at the time of sanctioning these topup loans, the RBI said.

Interestingly, on March 4, the RBI had barred IIFL Finance, a large player in the gold loan segment, from sanctioning or disbursing gold loans, citing supervisory concerns, which included deviations in assaying and certifying purity and net weight of gold at the time of sanctioning loans and at the time of auction.

The central bank also found breaches in the LTV ratio, significant disbursements and collections of loan amounts in cash far in excess of the statutory limit, non-adherence to the standard auction process, and lack of transparency in charges on customers.

After eight months, the RBI, earlier this month, removed the restrictions imposed on the Mumbai-based NBFC.