RBI’s Review of Gold Loan Practices Uncovers Irregularities

The Reserve Bank of India (RBI), vide circular dated September 30, 2024, bearing reference number RBI/2024-25/77 DoS.CO.PPG.SEC.10/11.01.005/2024-25, has called for strict adherence to prudential norms, particularly for loans secured against gold ornaments and jewellery. RBI has urged all supervised entities (SEs) to undertake a comprehensive review of their existing gold loan policies and practices. The directive came in response to recent findings of widespread non-compliance during RBI’s onsite examinations and reviews.

Key deficiencies identified include:

(a) In loans extended through partnerships with Fintech entities or business correspondents (BCs), several irregularities were observed, such as gold valuation being conducted without the customer’s presence, credit appraisal and valuation being handled entirely by the BCs, gold being stored under BC’s custody, and delays and lack of security during transportation of the gold to branches. KYC procedures were also carried out by Fintechs, and internal accounts were used for both disbursement and repayment of loans.
(b) A robust system for regular monitoring of the Loan-to-Value (LTV) ratio was missing, with several SEs breaching regulatory LTV ceilings. In instances where system-generated alerts were available, these were not actively pursued to rectify the breaches.
(c) The application of risk weights by some entities did not align with prudential regulations.
(d) For non-agricultural loans, the end-use of funds was typically not verified, while proper documentation for agricultural loans was often lacking.
(e) Furthermore, many SEs did not have a unique identifier for top-up gold loans in their Core Banking System or Loan Processing System, resulting in loans being used primarily for evergreening. No fresh appraisal was performed at the time of sanctioning these top-up loans.
(f) Numerous loan accounts were closed shortly after sanctioning, within just a few days, casting doubts on the economic rationale behind such transactions.
(g) In some SEs, the average realization from gold auctions after customer defaults was lower than the estimated value, indicating valuation process deficiencies.
(h) The proportion of gold loans disbursed in cash was high in some entities, and statutory limits on cash disbursements as per the Income Tax Act, 1961 were not adhered to in many instances.
(i) Weak governance and transaction monitoring were evident, as indicated by an unusually high number of gold loans granted to the same individual using the same PAN number within a financial year.
(j) Some SEs were found rolling over loans at the end of their tenor with only partial payments, and many did not categorize overdue loans as NPAs (Non-Performing Assets), instead renewing them or issuing fresh loans. Monitoring by senior management and the Board was inadequate, and controls over third-party entities were insufficient or absent altogether.\

SEs have therefore been directed to implement remedial measures in a time-bound manner, ensuring that robust internal controls are in place, particularly over outsourced activities and third-party service providers.

Additionally, the RBI has mandated that all SEs report the actions taken to address these issues to the Senior Supervisory Manager (SSM) of the Reserve Bank within three months of the circular’s issuance date. SEs found to be in violation of the prescribed standards may face supervisory action, which could include penalties and other enforcement measures.

The circular is effective immediately, emphasizing the urgency with which the RBI expects SEs to address the identified gaps and is applicable to all Commercial Banks (including Small Finance Banks but excluding Regional Rural Banks and Payments Banks), Primary (Urban) Co-operative Banks and all Non-Banking Financial Companies.