MUMBAI: In a review, the RBI has found major regulatory lapses by gold loan players and ordered urgent reforms, warning of strict supervisory actions for non-compliance with the guidelines.
The over Rs 10-trillion gold loan market is dominated by public sector banks and a few large NBFCs and is growing at over 18 percent amid rising gold prices which crossed Rs 7,800 per gram last week. People avail gold loans primarily due to the quick liquidity it offers. Gold loans are mostly used to meet both agricultural and non-agricultural financial needs.
The review exposed multiple deficiencies in the way many gold loan companies conduct their business. It also included onsite inspections of select supervised entities (SEs) and uncovered a series of irregularities in gold loan practices.
“The major deficiencies include shortcomings in 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 the loans; lack of transparency during auction of gold ornaments and jewellery on default by customers; weaknesses in monitoring of LTV; and incorrect application of risk-weights etc," the RBI said in a circular.
In some cases, gold loan players incorrectly apply risk weights, a key metric used to assess the financial risk associated with loans, the RBI said Monday.
"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 timebound manner," the central bank said in a statement.
"Further, the gold loan portfolio should be closely monitored, especially in the light of significant growth. It should also be ensured that adequate controls are in place over outsourced activities and third-party service providers," RBI added.
The RBI has underscored that SEs must ensure stronger controls over outsourced activities, including those involving third-party fintech firms, which have sometimes been left in charge of crucial tasks like loan appraisal, gold custody and KYC compliance. The RBI’s advisory also calls on all SEs to conduct a thorough review of their gold loan policies and practices to identify any gaps and take remedial measures promptly.
Corrective actions taken should be informed to the senior supervisory manager of the RBI within three months of the date of this circular, 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 said, adding this circular takes immediate effect.