RBI Finds Irregularities In Gold Loan Practices, Cautions Lenders

The Reserve Bank of India has found that select supervised entities carry several irregular practices in granting loans against pledges of gold ornaments and jewellery.

The major deficiencies include 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.

Lack of transparency during auction of gold ornaments and jewellery on default by the customer, weaknesses in monitoring of loan-to-value ratio and incorrect application of risk weights.

In this regard, the RBI has asked gold loan lenders to submit an action report to the senior supervisory manager of the central bank within three months of this circular.

"Noncompliance with regulatory guidelines in this regard will be viewed seriously and will attract, among other things, supervisory action by RBI," it said in a press release.

The central bank has advised all supervised entities to comprehensively review their policies, processes and practices on gold loans to identify gaps and initiate appropriate remedial measures in a time-bound manner.

The RBI also said the gold loan portfolio should be closely monitored, especially in light of significant growth in the portfolio in certain lenders.

"It should also be ensured that adequate controls are in place over outsourced activities and third-party service providers," the central bank said in a press release.

This has come as market participants have been raising concerns on many aspects of gold loan businesses. Recently, the RBI lifted restrictions on IIFL Finance's gold loan business, which it had imposed in March.

The central bank had issued a ban on IIFL Finance's gold lending, citing compliance issues such as serious deviations in assaying and certifying the purity and weight of gold, breaches in loan-to-value ratios, and excessive cash disbursal and collection beyond statutory limits.