The Reserve Bank of India (RBI) has issued a reference to its circulars containing prudential guidelines for loans against the pledge of gold ornaments and jewellery for Supervised Entities (SEs). Following a review of the adherence to these guidelines and an onsite examination of select SEs, the RBI has identified several irregular practices in the administration of these loans.
Key deficiencies observed include the following:
- Third-party involvement: SEs often used third parties, such as business correspondents (BCs) and Fintech entities, for sourcing and appraising loans. However, issues like valuation of gold without the customer’s presence and the improper custody of gold by third parties were noted.
- Inadequate valuation processes: Gold valuation was frequently conducted without the borrower being present, leading to concerns over transparency and accuracy.
- Lack of due diligence and end-use monitoring: There was insufficient verification of how the borrowed funds were being used, particularly in non-agricultural loans. Documentation for agricultural loans was also found lacking.
- Weak LTV monitoring: SEs were observed breaching the regulatory Loan-to-Value (LTV) ceiling without adequate controls. Alerts generated by monitoring systems were not actively addressed.
- Risk-weight discrepancies: SEs did not apply risk weights in accordance with prudential regulations.
- Auction transparency: In the event of customer default, there were transparency issues in gold auctions, with the average realization from auctions often being lower than the estimated gold value.
- Top-up loans and evergreening: SEs often issued top-up loans without fresh appraisals, and there were indications of evergreening loans, where overdue loans were renewed or replaced with new ones without addressing repayment concerns.
- Cash disbursement violations: Many SEs exceeded the statutory limits for cash disbursement under the Income Tax Act, with a high proportion of loans being disbursed in cash.
- Governance issues: SEs displayed weak governance and transaction monitoring, with some instances of the same individual being granted multiple gold loans under the same PAN.
In response, the RBI has directed all SEs to conduct a comprehensive review of their policies and processes related to gold loans. They are advised to take appropriate remedial actions within a specified timeframe and ensure robust monitoring of their gold loan portfolios. Any non-compliance with regulatory guidelines will attract supervisory actions from the RBI. This circular is effective immediately, and SEs must report their compliance within three months.
