Time for RBI to review its gold loan lending guidelines
Time to review gold loan lending practices
(This blog is released after the edited version of this article was published in business line on 09.12.2024)
The Reserve Bank of India (RBI), recently, advised regulated
entities (REs) in the financial sector to comprehensively review their policies,
processes and practices on gold loans in the light of certain irregular
practices observed during its onsite examination of select REs. It may be recalled
that in Mar 24, the regulator imposed restrictions on a NBFC under Section
45L(1b) of RBI Act, 1934 for certain material deficiencies observed in the
latter's gold loan portfolio. While certain deficiencies like (i) variance
in application of risk weights, when the gold loan becomes NPA (ii) non-categorization
of gold loans as NPA in the system, etc. can be streamlined by enhancements in the
system and effective audit trails, the other irregularities pointed out by the
regulator are serious in nature.
Fine-tuning outsourcing arrangements and protection of customer interests are called for in respect of some issues relating to the lending practices now in vogue. Some such measures are:
1. Gold
Loans lent through outsourced centres/third party entities/BCs: RBI
has commented on the valuation, custody, delay and insecure mode of
transportation of gold by the outsourced entities, especially the business correspondents (BCs), when they source the
application for sanction by the SEs. Gold accepted as a security for a loan
is different from loans against other securities like shares, mutual fund
investments, which are Demat securities. A question comes to the mind
immediately as to whether RBI should continue to permit acceptance of gold (for
a loan) as an accepted outsourcing activity? Gold is a physical commodity and
the weight and purity are subject to
safety, security and manipulation risks, before it reach a banker for loan
disbursal. The gold should be brought in by the applicants personally to the
banking counter and only the loan applications should be filled in and vetted
at the outsourcing centres, which can complete the know your customer (KYC)
formalities as well. The loan disbursal process at the bank can be faster, since
they need to test the purity, weigh the gold and sanction only, with
the other formalities being already completed at the outsourcing centres.
2. Valuation of Gold in the absence of a
Customer: Two years back, I came across an incident in a scheduled
commercial bank (SCB), where some gold loan customers alleged that a part of
the gold ornaments pledged by them were found missing, when the loans were
redeemed. The modus operandi adopted was simple. The gold loan sanctioning
official was given a separate cabin to entertain the gold loan customers. After
handing over the gold ornament and filling in the application, the customers
will be asked to go out and bring photocopies of the KYC documents. When the
customer comes back, the gold will be weighed in his presence and the loan will
be sanctioned. During the customer’s absence, the allegation was that, the loan
sanctioning official removed a small portion of the ornament, not visible to
the naked eye at a glance, and made huge profits. How the bank settled the
claims of the customers, who complained of shortage of gold when they redeemed
the loans, is still unknown.
The key takeaway is that gold loans should be sanctioned, not in
exclusive cabins, but in a safe place in the banking hall, where all the
activities are watched by both the staff
and public. Operating guidelines should include (i) get an instant photo of
gold ornaments to be pledged and attached as part of loan application (ii)
making the signature of the customer mandatory below the gross and net
weight columns in the application and (iii) confirmation from the other
joint custodian of gold that the customer signed below the gross and net weight
columns in his presence.
3. End Use of Funds: In the list of illustrative deficiencies given by RBI, end use of funds, not usually verified for non-agricultural gold loans and lack of proof of proper documentation obtained for agricultural gold loans were included. Instructions, if any, issued by the regulator in this regard should be done away with. In foreign countries, even in
respect of project finances, end use of funds becomes the responsibility of the
beneficiaries, with trigger conditions for violations. Gold loan is
basically a consumer loan. In respect of agricultural gold loans, it is
sufficient to obtain a copy of the agricultural land, (to ensure that the
applicant is a farmer and the loan is based on scale of finance) and a
declaration that the money will be used for agricultural purposes. Penalty
conditions including higher interest, recall of loans etc. will trigger, if
there is a violation.
4. Sanction of more gold loans to the same
individual during a year/loans closed within a short-time: Gold Loans are
availed by individuals for meeting emergent needs and family sentiments are
attached with any gold ornament being pledged. As and when cash is raised from
other sources, it is a common practice to redeem and take back the
gold for day to day wearing or keep it at home, their 'Grahalakshmi'.
In fact, the average period of gold loans in most of the banks is 60-90 days. Hence, there is no harm in (i) sanctioning multiple gold loans to the same individual during a year and (ii) early pre-closures, unless there are other valid concerns.
5. Renewal/
sanction of gold loans based on part payments received:
a. A liberal
overdraft facility (akin to overdraft loans against shares) with review of
margin at constant intervals (as the value of gold varies on a daily basis) can
be introduced for grant of personal gold loans. Since it is a running facility,
customers will be able to make remittances periodically and withdraw for their
needs based on the drawing power available. This facility, might in the long run, obviate the need to evergreen, through disguised part payments,
when the loan was about to become overdue.
b. Renewal of a gold loan/enhancement when due, accepting interest payment alone, may be considered favourably as (i) the value
of gold appreciates over a period (ii) the loan is fully secured and (iii) gold
is an eligible cash collateral for capital adequacy purposes. Gold loan, where
the security is in the hands of the REs and which can be set-off through auctions
without the intervention of the court, needs to be treated differently from a regular
cash credit for agricultural/other activities and unsecured loans.
While the regulator may prescribe a board approved policy with
adequate safeguards to avoid evergreening practices, in renewal of gold loans, sanctioned
as an overdraft or otherwise, accepting part payment, which is at least
equivalent to the interest portion, should be allowed in the normal course.
I honestly feel that RBI should revisit its extant guidelines on
outsourcing activities and lending practices on sanction of gold loans.
Regards
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