The Reserve Bank of India (RBI) says it has observed several irregular practices by gold loan businesses and has asked supervised entities (SEs), including non-banking finance companies (NBFCs), to review their policies and also undertake a portfolio review.
Recently, RBI reviewed the adherence to prudential guidelines and practices being followed by SEs for loans against pledges of gold ornaments and jewellery. The review and the findings of the onsite examination of select SEs by RBI indicated several irregular practices in this activity. The significant 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 an auction of gold ornaments and jewellery on default by the customer, weaknesses in the monitoring of loan-to-value (LTV) and incorrect application of risk-weights.
According to RBI, in loans granted through partnerships with fin-tech entities or business correspondents (BC), it found practices such as valuation of gold being carried out in the absence of the customer, credit appraisal and valuation done by the BC itself, gold stored in the custody of BC, delayed and insecure mode of transportation of gold to the branch, KYC (know-your-customer) compliance being done through fintechs and use of internal accounts for disbursement as well as repayment of loans.
The central bank also found instances of weak governance and transaction monitoring of an unusually high number of gold loans being granted to the same individual with the same PAN during a financial year.
Further, it observed the practice of rolling over loans at the end of tenure, with only partial payment in many SEs. RBI noted that some SEs are not categorising gold loans as non-performing assets (NPA) in the system and are evergreening by renewing overdue loans or issuing fresh loans. There is inadequate monitoring by senior management or board and inadequate or absence of controls over third-party entities, the central bank says.
According to the central bank, there is a lack of a specific identifier for top-up gold loans in the core banking system (CBS) or loan processing system with the SEs, mostly to facilitate the evergreening of loans. "Also, no fresh appraisal was done at the time of sanctioning these top-up loans. Many loan accounts were closed within a short time from sanction, i.e. within a few days raising doubts over the economic rationale for such action."
RBI also found gaps in the valuation process in some SEs. It says, "Average realisation from the auction of gold on default by the customer was lower in certain SEs than the estimated value of gold."
In some entities, the share of gold loans disbursed in cash to total gold loans disbursed was high, and the statutory limit specified under the Income Tax Act, 1961 on cash mode of disbursal was not adhered to in many cases, RBI says.
"Lack of a robust system for periodical LTV monitoring with instances of breach of regulatory LTV ceilings observed in some SEs. System generated alerts, where available, were not pursued actively to address the breach in LTV ceiling," it says.
For non-agriculture gold loans, the end use of funds was usually not verified, RBI says, adding it found a lack of proof or proper documentation obtained and retained for these gold loans.
CLEAR INDICATORS of Systemic ROT which even a child would understand!
"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 an auction of gold ornaments and jewellery on default by the customer, weaknesses in the monitoring of loan-to-value (LTV) and incorrect application of risk-weights.