The Reserve Bank of India (RBI), via a circular, has highlighted "irregular practices" in loans against gold ornaments and jewellery by supervised entities (SE) and directed banks and NFBCs to review their lending practices. They have also been asked to closely monitor gold loan portfolios as the apex bank observes significant growth in this segment. This circular is applicable with immediate effect.
Key points of observations by RBI:
The RBI, after a review of loans against pledges of gold ornaments and jewellery, found several irregular practices. The major deficiencies include (i) shortcomings in the use of third parties for sourcing and appraisal of loans; (ii) valuation of gold without the presence of the customer; (iii) inadequate due diligence and lack of end-use monitoring of gold loans; (iv) lack of transparency during auction of gold ornaments and jewellery on default by the customer; (v) weaknesses in monitoring of LTV; and (vi) incorrect application of risk-weights, etc.
The RBI says in loans granted through partnership with fintech entities or business correspondents (BC), practices such as the valuation of gold being carried out in the absence of customer, credit appraisal and valuation done by the BC itself, gold stored in the custody of BC, delayed and insecure mode of transportation of gold to the branch, KYC compliance being done through fintech, and the use of internal accounts for disbursement as well as the repayment of loans were observed.
The RBI finds that entities lack a robust system for periodical loan-to-value or LTV monitoring with the instances of breach of regulatory LTV ceilings. System-generated alerts, where available, were not pursued actively to address the breach.
End use of funds was usually not verified for non-agriculture loans, says the RBI, adding that there was a lack of proof or proper documentation obtained and retained regarding agriculture gold loans.
The RBI finds that there was a lack of a specific identifier for top-up gold loans in the core banking system or loan processing system with the SEs mostly to facilitate the evergreening of loans. Also, no fresh appraisal was done during the sanctioning of these top-up loans.
The RBI says all supervised entities (SEs) are advised to review policies, processes and practices on gold loans to identify gaps, including those highlighted in this advice, and initiate appropriate remedial measures timely.
Additionally, the RBI found weak governance and transaction monitoring as instances of the unusually high number of gold loans being granted to the same individual with the same PAN during a financial year.
The apex bank also found the non-categorisation of gold loans as NPA in the system, evergreening by renewing overdue loans or issuing a fresh loan, inadequate monitoring by senior management or board and inadequate or the absence of controls over third-party entities.
The RBI says the SEs must closely monitor the gold loan portfolio, especially in light of significant growth in the portfolio in certain SEs. It should ensure adequate controls are in place for outsourced activities and third-party service providers.
All banks and NBFCs will inform about these measures taken by them to the Senior Supervisory Manager (SSM) in three months. If any entity is found not complying with these regulatory guidelines, they could attract supervisory action from the RBI.
