RBI Flags Concerns Over Top-Up Loans Without Fresh Appraisal as Gold Loan Segment Grows

RBI Flags Concerns Over Top-Up Loans Without Fresh Appraisal as Gold Loan Segment Grows

The Reserve Bank of India (RBI) has raised concerns over various irregularities in the gold loan sector, urging borrowers to be cautious about the valuation of their pledged gold and the practice of rolling over part-paid loans. Borrowers should avoid unsanctioned top-up loans and unsolicited offers, especially from fintech lenders.

Following a recent review, the RBI identified several operational deficiencies in the gold loan sector, including misapplication of risk weights, inadequate monitoring of loan-to-value (LTV) ratios, and improper gold valuation. The central bank highlighted the risks associated with rolling over gold loans without fresh appraisal and granting top-up loans. These practices, the RBI noted, could lead to increased financial strain for borrowers.

Between FY20 and FY24, the organized gold loan sector grew at a compound annual growth rate (CAGR) of 25%, driven by rising gold prices. Over the past year, domestic gold prices have surged 33%, and 50% over two years, prompting many borrowers to pledge their gold for higher loan amounts.

Gold loans are issued for a specific term, and borrowers can request top-up loans after partial repayment or opt for rollovers to extend the loan term. However, the RBI has warned against the practice of rollovers or relying on top-up loans without a proper assessment, which may conceal underlying debt issues. Adhil Shetty, CEO of Bankbazaar.com, advises borrowers to evaluate their ability to repay before opting for rollovers to avoid falling into a debt trap.

Valuation Concerns and Borrower Responsibility

The RBI has flagged concerns about gold valuation practices, particularly when done without the borrower's presence, especially in partnership with fintech lenders or business correspondents. Gold is typically valued based on the average closing price of 22-carat gold over the previous 30 days, as quoted by the Indian Bullion and Jewellers Association. If the pledged gold is of lower purity, it is converted to its equivalent value in 22-carat terms, with deductions made for stones and making charges before determining the final loan value.

Borrowers are required to provide proof of ownership for their gold, and some banks may ask for additional documentation, such as a no-objection certificate from the household. Identity proof, address proof, and in some cases, income proof, are necessary documents for loan approval. For agricultural loans against gold, additional documentation may be required to prove the intended use of the funds.

Gold loan tenures range from seven days to three years, with some lenders offering up to five years. Borrowers can secure loans for up to 75% of the gold’s value. However, if the gold prices fall sharply, pushing the LTV ratio beyond the regulatory limit, borrowers must pledge additional gold or deposit cash to bring the ratio back within RBI guidelines. Failure to do so allows lenders to sell the pledged gold.

Interest Rates and Repayment Options

Interest rates on gold loans vary between 8.4% to 17% annually, depending on the LTV ratio, loan term, and repayment option. Higher LTV ratios and longer loan terms typically come with higher interest rates. Borrowers who can repay their loans within one to two years will find gold loans more cost-effective.