RBI has found several irregular practices in grant of loans against pledge of gold ornaments and jewellery by some Supervised Entities (SEs). This comes after the Central Bank carried out a review of the adherence to prudential guidelines as well as practices being followed by SEs.
RBI notification says, ”All SEs are, therefore, advised to comprehensively review their policies, processes and practices on gold loans to identify gaps, including those highlighted in this advice, and initiate appropriate remedial measures in a timebound manner.”
Some of the major deficiencies include -shortcomings in 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 auction of gold ornaments and jewellery on default by the customer, weaknesses in monitoring of LTV, incorrect application of risk-weights, etc.
RBI said that in loans granted through partnership with Fintech entities/ business correspondents (BC), carry out valuation of gold in the absence of 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 compliance being done through Fintechs, use of internal accounts for disbursement as well as repayment of loans were observed.
The central bank also mentioned, “Share of gold loans disbursed in cash to total gold loans disbursed was high in some entities and the statutory limit specified under the Income Tax Act, 1961 on cash mode of disbursal was not adhered to in many cases.”
To prevent such deficiencies the Reserve Bank said “ the gold loan portfolio should be closely monitored, especially in the light of significant growth in the portfolio in certain SEs. It should also be ensured that adequate controls are in place over outsourced activities and third-party service providers.”
RBI also asked Supervised Entities to inform to the Senior Supervisory Manager (SSM) of Reserve Bank within three months about the actions taken by them to resolve these issues. Non-compliance with regulatory guidelines will be viewed seriously and will attract supervisory action by RBI.
Here is full notification if you want to have a look.