RBI Raises Concerns Over Irregularities in Gold Loan Practices

RBI Raises Concerns Over Irregularities in Gold Loan Practices

The Reserve Bank of India (RBI) has identified significant irregularities in the processing of loans secured against gold jewelry among various supervised entities. Following a review and on-site inspections of select financial institutions, the RBI noted several deficiencies that necessitate urgent attention.

In a notification issued on Monday, the central bank emphasized the need for a comprehensive review of gold loan processes and practices to rectify any regulatory lapses. The RBI warned that non-compliance with established guidelines could lead to serious supervisory actions.

Key issues highlighted include the improper use of third parties for loan sourcing and appraisal, the evaluation of gold without the customer’s presence, insufficient due diligence, and a lack of monitoring regarding the end-use of gold loans. The RBI has mandated that gold loan providers submit an action report to the central bank’s senior supervisory manager within three months.

The central bank advised all supervised entities to meticulously review their gold loan policies and practices to identify gaps, particularly those mentioned in the notification, and to implement necessary corrective measures promptly. It also stressed the importance of maintaining robust controls over outsourced activities and third-party service providers.

The RBI has called for close monitoring of the gold loan portfolio, especially given the substantial growth in this sector among certain entities. With gold prices reaching record levels, the demand for gold loans has surged dramatically, with outstanding loans increasing by 40% to ₹1.32 lakh crore as of the end of July, compared to ₹95,344 crore a year earlier.

Concerns have also been raised about the outsourcing of Know Your Customer (KYC) compliance to third parties, potentially compromising the thoroughness of due diligence. Additionally, inadequate monitoring of loan-to-value (LTV) ratios has been noted, with some institutions failing to act on breaches of regulatory limits. Despite receiving system-generated alerts, necessary corrective actions were often overlooked, indicating lapses in governance.

The review also uncovered instances where individuals obtained an unusually high number of gold loans under the same PAN within a single financial year, suggesting possible misuse of the lending process. The RBI reiterated the need for stringent controls over outsourced activities and third-party service providers to mitigate these risks.