Looking for gold loan? RBI move to tighten rules may make it tougher for you. Here’s why

Reserve Bank of India (RBI) plans to ask banking lenders to follow stricter underwriting processes for gold loans and monitor the end-use of funds as it tries to cool growth in the fast-growing segment. According to news agency Reuters, the RBI wants banks and non-banks to also increase background checks on borrowers and specify the ownership of gold being mortgaged.

“The RBI wants to ensure that the entities are following a standard protocol and any growth in the gold loan sector is not out of bounds. It wants to make sure that any unethical business practices are curbed and financial stability is protected," sources told Reuters. Since September 2024, banks' gold loans have been rising by 50 per cent, sharply outpacing the growth in overall loans in India, bolstered in part by tighter norms for unsecured lending.

Also Read: Gold loan GNPA up 18% in banks, upper and middle layer NBFCs from March-June 2024

RBI plans to tighten gold loan processes

In India, the world's second-biggest consumer of the precious yellow metal, households typically buy gold during festivals and weddings. Record prices make gold loans more attractive. In September, the RBI said it found several irregular practices in gold loans and asked lenders to comprehensively review their lending processes to identify and address the regulatory lapses.

Also Read: RBI flags gold loan irregularities; lenders may shift to EMIs, term loans amid regulatory pressure

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

According to Reuters, fintech agents of banks were collecting gold, storing and weighing it, tasks that lenders are meant to handle. Lenders also auctioned gold without informing borrowers who had defaulted. The report added that the banking regulator aims to treat all lenders uniformly to ensure no entity bypasses regulations, including for gold auctions and monitoring the use of the loaned money through receipts.

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