RBI flags evergreening, unethical lending practices in gold loans

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The Reserve Bank of India (RBI) on Monday said it has observed several irregular practices in the manner in which gold loan sanction and servicing is being conducted by certain lenders, including evergreening of loans, shortcomings in usage of third parties for sourcing and appraisal of loans, and assessing valuation of such loans without the presence of customers, among others.

“Reserve Bank has recently carried out a review of the adherence to prudential guidelines as well as practices being followed by SEs with regard to loans against pledge of gold ornaments and jewellery. The review, as well as the findings of the onsite examination of select SEs (supervised entities) by the Reserve Bank, indicate several irregular practices in this activity,” the central bank said.

Weak governance and transaction monitoring were observed as instances of unusually high number of gold loans are being granted to the same individual with the same PAN during a financial year. Practice of rolling over loans at the end of tenor, with only part payment was also prevalent.

Many loan accounts were closed within a short time from sanction, or within a few days, raising doubts over the economic rationale for such actions. Average realisation from auction of gold on default by the customer was lower than the estimated value of gold, reflecting among other things, gaps in valuation process.

More importantly, non-categorisation of gold loans as bad loan in the system, evergreening by renewing overdue loans via fresh loan, inadequate monitoring by senior management and board, and inadequate or absence of controls over third-party entities were some of the core concerns flagged by the RBI.

Major concerns

In gold loans granted through partnership with fintech entities or business correspondents (BC), practices such as valuation of gold being carried out in the absence of customer, credit appraisal and valuation done by the BC itself, gold being stored in the custody of BC, and delayed, insecure mode of transportation of gold to the branch were flagged. Certain gold loan lenders were also conducting KYC via fintechs, and were found using internal accounts for disbursement as well as well as repayment of loans.

The RBI also flagged weaknesses in monitoring of loan to value (LTV) ratio for gold loans. This gains importance as the regulator in March had barred IIFL Finance from sanctioning gold loans due to non-adherence with regulations which say that NBFCs cannot extend more than ₹20,000 cash in while advancing gold loans. The central bank also said that IIFL Finance did not follow the 75 per cent LTV ratio norm. The ban on IIFL Finance was removed earlier this month, after the NBFC took corrective actions.

Furthermore, the RBI today said that certain lenders are also not assigning adequate risk weights on gold loans, and there was a lack of proof in respect of agriculture gold loans.

“Lack of a specific identifier for top-up gold loans in the Core Banking System / Loan Processing System with the SEs mostly to facilitate evergreening of loans. Also, no fresh appraisal was done at the time of sanctioning these top up loans,” the regulator said.

Regulated entities may inform the RBI about action taken against such unethical practices within three months. “Non-compliance with regulatory guidelines in this regard will be viewed seriously and will attract, among other things, supervisory action by RBI,” the central bank said.