RBI flags alarming practices in gold loan market, orders urgent reforms for financial institutions

The Reserve Bank of India (RBI) has issued a significant advisory to financial institutions regarding their handling of loans secured against gold ornaments and jewellery, following a comprehensive review. This review exposed multiple deficiencies in the way many Supervised Entities (SEs) are conducting this business, prompting the RBI to call for urgent reform.

The review, which also included onsite inspections of select SEs, uncovered a series of irregularities in gold loan practices. Among the most serious shortcomings were the improper use of third parties for sourcing and evaluating gold loans, conducting valuations without the customer present, and failing to monitor how the loan proceeds were being used. There were also concerns about transparency during auctions of gold jewellery when customers defaulted on their loans, as well as weaknesses in monitoring the loan-to-value (LTV) ratios. In some cases, SEs incorrectly applied risk weights, a key metric used to assess the financial risk associated with loans.

"All SEs are, therefore, advised to comprehensively review their policies, processes and practices on gold loans to identify gaps," the central bank noted. 

The findings have raised significant concerns about the governance practices in certain institutions, especially in light of the growing popularity of gold loans in India, which are commonly used to meet both agricultural and non-agricultural financial needs. The RBI underscored that institutions must ensure stronger controls over outsourced activities, including those involving third-party fintech firms, which have sometimes been left in charge of crucial tasks like loan appraisal, gold custody, and Know Your Customer (KYC) compliance.

The RBI’s advisory calls on all SEs to conduct a thorough review of their gold loan policies and practices to identify any gaps and take remedial measures promptly. 

"All SEs are, therefore, advised to comprehensively review their policies, processes and practices on gold loans to identify gaps," the central bank noted. 

"Further, 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," RBI added.

The irregularities noted by the RBI include various alarming practices, such as loan rollovers, evergreening of overdue loans, and non-categorization of bad loans as Non-Performing Assets (NPAs). Some SEs were also found to have breached the statutory limit on cash disbursement of gold loans, while governance and oversight issues allowed some individuals to secure an unusually high number of loans under the same PAN in a single year.

In response, the RBI has emphasized that non-compliance with these regulatory guidelines will be met with strict supervisory action.