RBI finds irregular practices in gold loans, asks lenders to review policies, monitor portfolio

The Reserve Bank of India (RBI) on Monday said it has observed several irregular practices by gold loan businesses, and asked entities to review their policies and also undertake a portfolio review.

A recent review on adherence to prudential guidelines revealed several deficiencies with regard to loans against pledges of gold ornaments and jewellery, the central bank said in a communication to lenders.

The major deficiencies include shortcomings in the 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 and lack of transparency during an auction of gold ornaments and jewellery in the case of a default, the RBI said.

A recent study by the rating agency Icra said there is a handsome growth in gold loans despite recent actions by the regulator and estimated the portfolio of organised gold lenders to grow to ₹10 lakh crore by March 2025.

It also found weaknesses in the monitoring of loan-to-value ratios and incorrect application of risk weights, among other shortcomings.

It advised all supervised entities in the gold loan business to undertake a "comprehensive review" of their policies and process, identify the gaps and initiate appropriate remedial measures in a "time-bound manner".

"The gold loan portfolio should be closely monitored, especially in the light of significant growth in the portfolio in certain SEs (supervised entities)," the notification read.

It should also be ensured that adequate controls are in place over outsourced activities and third-party service providers, the RBI notification added.

The gold loan entities may inform the RBI's senior supervisory manager about the action taken within three months, it said.

"Non-compliance with regulatory guidelines in this regard will be viewed seriously and will attract, among other things, supervisory action by the RBI," it warned.