RBI Cracks Down on Gold Loan Irregularities: Whats Behind the Sudden Concern?
The Reserve Bank of India (RBI) has identified several irregularities in the process of granting loans against gold jewellery following a recent review and direct inspections of banks and financial institutions. In response, the central bank has issued a circular mandating a detailed review and corrective action within three months.
Key Findings in Gold Loan Practices:
1. Irregular Gold Valuation Process
- Third-party jewellery appraisers were used without proper oversight.
- Valuation was conducted without the presence of the customer.
2. Poor Monitoring and Loan Mismanagement
- Lack of supervision over loan repayments.
- Insufficient efforts to prevent customers from auctioning pledged jewellery.
- Weak tracking of gold loans, leading to potential misrepresentation and weight discrepancies.
3. Issues with Top-up Loans and Cash Disbursements
- No fresh valuation for top-up loans, raising concerns about stability.
- Some loan accounts were closed within days, questioning the economic justification.
- The actual value of auctioned gold was lower than its assessed valuation in many cases.
- Violations of the Income Tax Act, 1961, where cash disbursements exceeded statutory limits.
- Multiple gold loans sanctioned to a single borrower using the same PAN, signaling weak transaction monitoring.
4. Unregulated Interest Payments and Loan Renewals
- Interest-only payments at the end of the loan tenure, increasing default risks.
- Renewals and fresh loans were granted without following proper procedures.
- Third-party institutions involved in loan processing lacked adequate oversight.
RBI’s Directives to Banks and Financial Institutions
- Banks and NBFCs must conduct a thorough review of gold loan policies, processes, and procedures.
- Immediate corrective measures should be implemented, with compliance reports submitted to the Senior Manager of RBI within three months.
- Failure to adhere to these regulatory guidelines will result in strict supervisory action by the RBI.
Clarification on Gold Loan Practices
When questioned about the existing loan repayment structure, RBI sources clarified that:
- Borrowers cannot pay only interest and retrieve their pledged jewellery without repaying the principal.
- This practice, though cocommonly observed, leads to prolonged debt and eventual jewellery auctions.
- The RBI aims to prevent financial distress for borrowers by ensuring proper repayment structures.
With these measures, the RBI seeks to bring greater transparency and accountability to gold loan practices while safeguarding both lenders and borrowers from potential financial risks.
