Agri Gold Loans May Be Under RBI's Scanner After Sharp Growth

Outstanding agricultural gold loans in the banking system stood at Rs 6.5 lakh crore as of March 2024, up 27% year-on-year, according to ICRA Ltd. In contrast, regular bank loans against gold jewellery stood at Rs 1.03 lakh crore, RBI data showed.

Agricultural gold loans are crop loans or loans given for agricultural or allied purposes against pledge of gold, which falls under the priority sector lending category.

Mainly public sector banks, regional banks and some non-banking financial companies are said to be major lenders in this space, analysts said.

For the quarter ended September, agricultural gold loan contributed 82% of Karur Vysya Bank's total gold loan portfolio of Rs 20,878 crore.

According to the first of the five people quoted above, the regulator might be concerned with misuse of these loans by borrowers, as the outstanding dues are much higher than other crop loans.

An email sent to the RBI seeking a comment on the matter remained unanswered at the time of filing this story.

In a circular last month, the RBI advised lenders to review their policies, processes and practices in granting loans against pledge of gold ornaments. The regulator conducted a review of how lenders adhere to its norms.

The major deficiencies found by the RBI include:

(i) shortcomings in use of third parties for sourcing and appraisal of loans

(ii) valuation of gold without the presence of the customer

(iii) inadequate due diligence and lack of end use monitoring of gold loans

(iv) lack of transparency during auction of gold ornaments and jewellery on default by the customer

(v) weaknesses in monitoring of LTV

(vi) incorrect application of risk-weights

The central bank added that there was "lack of proof or proper documentation obtained and retained in respect of agriculture gold loans".

RBI's warnings in the latest circular "could partly arrest the sharp growth in gold loan disbursements over the near term," Karthik Srinivasan, group head - financial sector ratings at ICRA said.

Bankers believe that chances of gold being pledged turning to be spurious is another operational risk. The assessment methods such as jewel appraisal and chartometer could also be misleading, prompting for strengthening of inspection measures.

Agricultural gold loans have risen as several banks aim to meet their priority sector lending shortfall. Banks are required to maintain 40% of their adjusted net bank credit toward priority sector loans.

Some of the other reasons behind the rise in agricultural gold loans include the higher loan-to-value ratios. Unlike regular gold loans, where banks are required to maintain LTV ratio of 75% at all times, banks can exercise more control over agricultural gold loans.

Some banks' LTV can go as high as 85% in this loan category, the first person quoted above said.

Moreover, better collection efficiency as compared to typical agricultural loans and as borrowers usually don’t default because there is sentimental value attached to gold also spurred the growth in this space.

While the RBI has asked to closely monitor the gold loan space, given the significant growth seen by certain lenders, only time will tell whether the rise in these loans will be curbed or not.