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Synopsis: The Reserve Bank of India (RBI) has identified significant irregularities in gold loan lending practices. A review revealed deficiencies in loan appraisal, valuation, due diligence, monitoring, and transparency in auctions, among others. To address these issues, the RBI has mandated supervised entities (SEs) to comprehensively review their policies and operations related to gold loans and rectify the deficiencies within three months. Non-compliance may result in supervisory action by the RBI.
The Reserve Bank of India (RBI) has issued a strong directive to gold loan lenders, urging them to address irregular practices identified during a recent review of the sector. The review uncovered several shortcomings, including issues with loan sourcing, gold valuation, due diligence, end-use monitoring, auction transparency, and risk-weight application.
The RBI's review highlighted that certain supervised entities (SEs) have been lax in following proper procedures while granting loans against the pledge of gold ornaments and jewellery. Major deficiencies observed include:
Third-Party Involvement: Use of third-party entities like Fintechs and business correspondents for loan sourcing and appraisal raised concerns about inadequate customer verification and improper custody of gold.
Valuation Practices: In many cases, gold valuation was carried out without the presence of the customer, leading to potential inaccuracies in determining loan amounts.
Due Diligence and Monitoring: The review found a lack of proper due diligence and insufficient monitoring of the end use of funds, especially in non-agricultural loans.
Auction Transparency: When customers defaulted on loans, auctions of pledged gold lacked transparency, resulting in lower recoveries than expected.
Loan-to-Value (LTV) Monitoring: SEs were found to be weak in monitoring LTV ratios, with instances of breaches of the regulatory ceilings going unnoticed or unaddressed.
In light of these findings, the RBI has directed all SEs involved in gold lending to undertake a comprehensive review of their policies, processes, and practices related to gold loans. The SEs must identify gaps and implement remedial measures within three months. The gold loan portfolio also requires close monitoring, especially given its significant growth in recent years.
Additionally, SEs must ensure that adequate controls are in place for outsourced activities and third-party service providers. Failure to comply with the RBI's guidelines could lead to severe regulatory and supervisory actions.
Action Required: Gold loan entities are required to inform the RBI's Senior Supervisory Manager (SSM) of the actions taken within three months. Non-compliance may lead to penalties and other regulatory actions by the central bank.
