The RBI survey reveals several “deficiencies” in how commercial banks grant gold loans against pledged ornaments and jewellery.
The Reserve Bank of India (RBI) on Monday said it observed various “irregular practices” by commercial banks while granting gold loans to people against gold ornaments and jewellery. The irregularities, it said, violated its guidelines related to loans by supervised entities (SEs).
The observation comes after the central bank reviewed the SEs’ adherence to “prudential” guidelines and the practices followed while sanctioning gold loans.
The bank has flagged several major deficiencies in its circular to all commercial banks, including small finance banks, urban cooperative banks and all non-banking financial companies. The advisory excludes the regional rural banks and the payments banks.
Some of the glaring deficiencies noticed included:
· Shortcomings in the use of third parties to source and appraise loans.
· Valuation of gold without the customer’s presence.
· Inadequate due diligence and lack of end-use monitoring of gold loans.
· The lack of transparency during an auction of gold ornaments on default by the customer.
· Weaknesses in monitoring of LTV.
· And incorrect application of risk weights, etc.
RBI said, “All SEs are, therefore, advised to comprehensively review their policies, processes and practices on gold loans to identify gaps, including those highlighted in this advice, and initiate appropriate remedial measures in a time-bound manner.
“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.”
It has directed the SEs to inform the reserve bank’s senior supervisory manager regarding the action taken within three months of the date of this circular.
“Non-compliance with regulatory guidelines in this regard will be viewed seriously and will attract, among other things, supervisory action by RBI,” it said.
What More It Observed
While granting gold loans through partnerships with fintech entities or business correspondents (BCs), the valuation of gold was being carried out in the absence of the customer, credit appraisal and valuations were done by the BCs itself, and gold was transported to the branch in an unsecured manner. Additionally, KYC compliance was being done through Fintechs, and the use of internal accounts for loan disbursement and repayment was also observed. Also, the share of gold loans disbursed in cash to total gold loans disbursed was high in some entities against the statutory limit specified under the Income Tax Act, 1961, on cash mode of disbursal.