Reserve Bank of India Governor Sanjay Malhotra on Wednesday said the central bank will soon come out with comprehensive guidelines on gold loans, a segment that has witnessed an explosive growth in the last one year. Gold loan rules are likely to be tightened by the regulator.
Banks and NBFCs reported a phenomenal growth in gold loan outstanding to Rs 1.78 lakh crore as of January 2025, a surge of 76.9 per cent on a year-on-year basis. With gold prices shooting up, gold loan business has grown rapidly.
Banks and NBFCs found it an attractive business since they can auction gold if the borrower defaults on the loan. Borrowers are now required to repay the full principal and interest on the loan if they want to repledge the gold and ask for an extension of the loan.
RBI review flags irregularities in gold loan practices
The RBI, which conducted a review of gold loan practices, found several irregular practices in the gold loan activity. The major deficiencies include shortcomings in the 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 gold loans, lack of transparency during auction of gold ornaments and jewellery on default by the customer, weaknesses in monitoring of LTV (loan to value) ratio and incorrect application of risk weights.
The RBI then asked banks and NBFCs to comprehensively review their policies, processes and practices on gold loans to identify gaps and initiate appropriate remedial measures in a timebound manner.
Further, the gold loan portfolio should be closely monitored, especially in light of significant growth in the portfolio. It should also be ensured that adequate controls are in place over outsourced activities and third-party service providers, the RBI said.
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