The Reserve Bank of India (RBI) on Monday directed banks and non-banking finance companies (NBFCs) offering gold loans to thoroughly review their policies, processes, and practices to identify any gaps, while closely monitoring their gold loan portfolios amid significant growth observed in some lenders’ portfolios.
Additionally, the RBI, through a circular, instructed these lenders to ensure adequate controls over outsourced activities and third-party service providers.
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Interestingly, on March 4, the RBI had barred IIFL Finance, a large player in the gold loan segment, from sanctioning or disbursing gold loans in March this year, 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 loan-to-value 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 its gold loan business.
Additionally, 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 the practice of rolling over loans at the end of the tenor, with only part payment. Additionally, they found non-categorisation of gold loans as non-performing assets (NPAs), evergreening by renewing overdue loans or issuing a fresh loan, inadequate monitoring by senior management/board, and inadequate or absent 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 RBI 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 disbursal was not adhered to in many cases.
Meanwhile, the RBI also found that many loan accounts were closed within a short time after sanction, i.e., within a few days, raising doubts over the economic rationale for such action. The RBI also found that the average realisation from the auction of gold following customer defaults was lower in certain lenders than the estimated value of gold, reflecting, among other things, gaps in the valuation process. Further, there was a lack of a specific identifier for top-up gold loans in the core banking system/loan processing system, mostly to facilitate the evergreening of loans. Also, no fresh appraisal was done at the time of sanctioning these top-up loans, the RBI said.
Moreover, the central bank found that in loans granted through partnerships with fintechs/business correspondents (BCs), the valuation of gold was being carried out in the absence of the customer, with credit appraisal and valuation done by the BC itself. Gold was stored in the custody of BCs, and there were delayed and insecure modes of transportation of gold to the branch. KYC compliance was being done through fintechs, and the use of internal accounts for disbursement as well as repayment of loans was observed.
First Published: Sep 30 2024 | 8:26 PM IST
