Gold Loans are safe, if sanctioned with due diligence

Are branch staff of banks' pressurised….
into sanction of Gold Loans?

The above picture depicts the promise of a bank that a gold loan up to Rs.50 lacs will be sanctioned within 5 minutes. It also says that loans will be sanctioned to non customers as well and the loans will be both for personal and business purposes. I captured this in my mobile, to present the position prevailing  in the branches of all the banks, especially in the Southern States. But whether a gold loan can be sanctioned within 5 minutes?  

Let us examine. The draft guidelines of RBI, most of which are already in practice in the commercial banks, stipulates the following: 

1. Whether the gold loan applications are sourced directly or through third parties like BCs (business correspondents), etc. the gold should be accepted in the branches of the lender only; apprising, and valuation should also be done by the staff of the lender only. 

2. Where the original receipts of the gold ornaments are not available to establish ownership, the lender should obtain a suitable document/ declaration from the borrower, explaining how the ownership is ascertained, so that pledging of stolen ornaments are avoided.

3. Assaying and valuation of gold should be done in the presence of the borrower. An e-certificate about the gold pledged covering details of gold, gross and net weight, image of the gold etc. should be prepared in duplicate and a copy be given to the borrower against his/her acknowledgment. 

4. KYC norms needs to be complied with, both for existing/new customers. 

5.  Business activity loans should be backed by evidences establishing income generation.

So, it is clear that a gold loan may never get sanctioned in 5 minutes. In the branches where I worked, even in respect of well known customers (and where the appraiser normally comes in the evening for confirmation of purity and net weight), completion of gold loan sanction facilities usually took 45 minutes. If the above advertisement, displayed before the bank branch, was used as a marketing strategy, I am fine with that. But if the promise is kept true, the chances of not complying with the safeguards enumerated are quite high. 

Quite often, I hear from the staff working in bank branches that there is an undue pressure from the superiors to sanction gold loans aggressively. Building up a gold loan portfolio - secured, short-term in nature, provides liquidity, relatively hassle free procedure for recovery in case of default - is definitely ideal. But the concerns associated with that portfolio also needs to be kept in mind.

A. Of late, there are many instances of fake documents being pledged with the knowledge/in connivance with gold appraisers. The amount involved is also not small. In some of the branches, miscreants were able to commit the fraud for a long period, capitalising the anxiety exhibited by the incumbents to grow the advances.

B. There were loopholes found in completion of KYC formalities/due diligence especially new customers.

C. The recent trend of north based banks opening new branches in the southern states only for taking advantage of the ever growing gold loan demand from the customers is fraught with risk. They can be easily duped by fraudsters. Apart from this risk, the bank branches may not be able to compete successfully in sourcing deposits or other loan products with the established players in the area.  

D. Gold loan growth crowd out the growth opportunities available in other sectors, especially in MSME/Agri segments.

E. The gold loan portfolio comprises 25-45 percent of the total advances in some of the banks and the growth in the other banks are also exponentially higher than the growth achieved in total advances. As the junior and middle management of today will be occupying the top positions tomorrow (laterally or otherwise), finding right kind of people with exposure to all fields of banking may become a daunting exercise. 

F. Income generating loans helps the customers to avail loans at cheaper rates and the banks to achieve their priority sector advance targets. Adequate measures are to be in place so that only the eligible get the scarce source of funds at concessional rates. This aspect should not be lost sight of by the staff concerned in their urge/rush to achieve the targets.

Regards

V. Viswanathan 

CGM Retired e-SBT 

31st May 2025