RBI To Push Lenders For Stricter Gold Loan Processes, Says Report

Since September 2024, gold loans from banks have been growing at a rate of 50 per cent, significantly outpacing the overall loan growth, partly due to stricter regulations on unsecured lending

The central bank is set to urge lenders to adopt stricter underwriting processes for gold loans and monitor the end-use of funds in an effort to curb the rapid growth of this fast-expanding segment, according to a Reuters report citing seven sources, including industry insiders and those familiar with the regulator's plans.

The Reserve Bank of India (RBI) aims to ensure that both banks and non-banking financial institutions enhance background checks on borrowers and verify the ownership of the gold being pledged, the sources, who requested anonymity due to media restrictions, revealed.

"The RBI wants to ensure that the entities are following a standard protocol and any growth in the gold loan sector is not out of bounds," one source familiar with the central bank's approach stated, according to the report.

"It wants to make sure that any unethical business practices are curbed and financial stability is protected," the source added in the report. 

Since September 2024, gold loans from banks have been growing at a rate of 50 per cent, significantly outpacing the overall loan growth, partly due to stricter regulations on unsecured lending.

In India, the world’s second-largest consumer of gold, households traditionally purchase gold during festivals and weddings. With record-high prices, gold loans have become increasingly attractive.

Irregular Practices In The Gold Loan Sector

In September, the central bank revealed it had discovered several irregular practices within the gold loan sector and instructed lenders to thoroughly review their lending processes to identify and address any regulatory lapses.

The RBI has identified issues in loan sourcing, as well as in the appraisal and valuation of gold, with one source familiar with the central bank's thinking stating in the report that "not all entities are following the standardised rules."

In audits conducted over the past 12 to 16 months, the RBI found irregularities in the portfolios of non-bank lenders and weaknesses in monitoring the amount of funds that can be lent against gold, according to two sources in the report.

Additionally, the RBI discovered that fintech agents of banks were handling tasks like collecting, storing, and weighing gold—responsibilities that should have been managed by lenders themselves, one industry source said in the report. Lenders were also reportedly auctioning gold without informing borrowers who had defaulted, the report added.

The regulator intends to apply uniform treatment across all lenders to ensure no entity bypasses regulations, including those concerning gold auctions and tracking the use of loaned funds through receipts, a second industry source added in the report.