RBI Plans Stricter Rules for Gold Loans

Reserve Bank of India (RBI) intends to ask banking lenders to follow stricter underwriting processes for gold loans and track the utilisation of funds as it tries to slow growth in the fast-growing segment. According to a source, the RBI wants banks and non-banks to increase background checks on borrowers and identify the ownership of gold mortgaged.

“The RBI wants to ensure that the entities follow a standard protocol and that any growth in the gold loan sector is not out of bounds. It wants to ensure that any unethical business practices are discouraged and financial stability is protected,” sources said. Since September 2024, banks’ gold loans have been rising by 50%, sharply outpacing the growth in overall loans in India, strengthened partly by stricter regulations for unsecured lending.

RBI Plans Stricter Norms for Gold Loans

India is the world’s second-biggest consumer of the precious metal gold. Households generally buy gold during marriages and festivals, and record prices make gold loans more attractive. In September, the central bank found various unethical practices in the gold loan industry and asked lenders to review their processes thoroughly to identify and address regulatory lapses.

India’s central bank, RBI, has identified shortcomings in loan sourcing,  gold valuation, and appraisal and stated that “not all entities are following the standardised rules.” In audits conducted over the last 12-16 months, the Reserve Bank of India found irregularities in the portfolios of non-bank lenders and weaknesses in tracking the amount of funds that can be lent against the precious metal gold.

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Gold Loans Surge as Borrowers Shift from NBFCs to Banks

Last year, total outstanding gold loans reached Rs 1,54,282 crore by October 18, up from Rs 1,02,562 crore in March 2024. This is a 56% year-on-year increase compared to 13% in October 2023. Bankers point to multiple reasons for this increase, including borrowers moving from non-banking financial companies (NBFCs) to banks and an inclination towards secured loans over unsecured options. At the same time, bank loans to NBFCs declined by 0.7% to Rs 1.5 lakh crore. 

Gold Loan Sanctions See Significant Growth

Here are three key points about the growth in gold loan sanctions:

1. 26% Year-over-Year Growth: Finance Industry Development Council data showed that gold loan sanctions in Q1 FY25 grew 26% year over year and 32% over the March quarter, with the total sanctioned amount equalling Rs 79,217 crore. 

2. Consistent Growth: The boost is not a one-time occurrence but has been consistent over many quarters. During April-June 2023, the increase was 10%. This growth was despite tough competition from banks in the segment. 

3. Growth of 41% year-over-year: According to the RBI’s sectoral data on bank credit for August 2024, gold loans grew nearly 41% year-over-year to Rs 1.4 lakh crore.

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According to a source, bank fintech agents were collecting, storing, and weighing gold, duties which lenders are supposed to handle. Lenders also auctioned gold without informing defaulting borrowers. The report added that the banking regulator targets treating all lenders uniformly to ensure no entity bypasses regulations, including for gold auctions and tracking the use of the loaned money through receipts.