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Gold loan risks: RBI exposes irregularities, borrowers beware

Submitted by admin on October 8th, 2024

While taking out a gold loan, a borrower needs to be aware of potential pitfalls. To have a secure experience, it is essential that you do proper research and compare interest rates and charges from various RBI-approved lenders.

Rising gold prices have pushed up the size of gold loans. Customers with higher gold holdings are also monetising their jewellery.

There is a notification issued by RBI on September 30; RBI claims to have found some alarming irregularities in the manner the certain SEs are giving gold loans, popularly known as gold loans against ornaments and jewellery.

The irregularities include lapses in usage of third-party agencies for sourcing and appraisal of loans, estimation of gold without the customer’s presence, and inadequate due diligence.

It also comprises deficiencies like the lack of transparency when auctioning gold ornaments and jewels in case a customer defaults, weak monitoring of LTV, incorrect application of risk weights, KYC compliance done through fintechs rather than by a person, loans rolled over at the end of their tenor with only partial payments.

The central bank found this after conducting a review of levels of adherence to prudential guidelines as well as practices being followed by SEs with regard to loans against pledged gold ornaments and jewellery.

In fact, increasing prices of gold have contributed to the volume and number of gold loans. Customers with higher gold holdings are also monetizing their jewelry. As more and more people are aware today, quite a number of customers treat a gold loan as a product of personal finance.

According to ICRA, the overall organized gold loan segment has grown at 25 per cent CAGR over FY20-FY24 inducted by banks, which have expanded loans at a higher CAGR of 26 per cent while NBFCs expanded theirs at an 18 per cent CAGR over the same period.

Public sector banks (PSBs) consisted of about 63 percent of the total gold loans in March 2024, which was higher than the 54 percent share in March 2019, while NBFC and private banks’ shares eased equally over this period.

Caution required to be exercised by Borrowers

• Conduct research and authentication

Taking a gold loan is a procedure that requires careful knowledge and caution not to fall victim to hazards. For a risk-free experience, one needs to study the loans available in detail, comparing interest rates and charges by different RBI-approved lenders to arrive at the choice that best serves individual needs.

• Learn about loan terms

When evaluating gold loan offers, scrutinize the terms carefully, looking out for interest rates, fees, loan tenure, repayment options and the LTV ratio, which should be in line with the 75 percent limit as prescribed by the RBI,,” said Shripad Jadhav, president, retail agriculture and gold loans, Kotak Mahindra Bank, in an interview with Dailyfinser.

• Be aware of the process of gold valuation and auction

Also, be aware of the lender’s process of gold valuation in case there is a default and the process of holding an auction.

• Be wary of red flags

While most banks, NBFCs, and fintech lenders offer offers if you “approach” them with a complaint about your existing lender, beware of “unsolicited offers”. According to him, “Red flags to watch out for are unusually jumping interest rates, lack of transparency in charges and repayment structure,” said Sharad Ingule, founder and former CEO, GoldUno, an online gold loans provider. Jump rate in gold loans indicates that the interest rate on the loan is increased if the scheduled date for repayment is missed or under certain conditions.

• Sufficient protection

For example, to safeguard your interest one should do the following; closely look at the reputability of the lender before taking a gold loan; ask him questions on the gold loan offer, clarify all your doubts; ensure clear and clean loan documentation; and finally, review the terms of the loan.

Exercising due diligence and awareness, you will be able to make an informed decision, avoid potential pitfalls, and safeguard your gold collateral.

Lenders given three months to review policies

The RBI has asked all SEs to review their policies and practices related to gold loans and take appropriate steps in three months. Non-compliance with regulatory guidelines will be taken seriously enough to attract supervisory action from the central bank.