As of the end of August, the total portfolio of gold loans in the banking sector reached ₹1.4 lakh crore, reflecting a growing reliance on gold as collateral for borrowing. This trend isn’t just a recent development; it has persisted over several quarters. Data from the Finance Industry Development Council indicates that gold loan sanctions in the first quarter of FY25 saw an impressive 26% year-on-year growth and a 32% increase compared to the previous quarter, amounting to ₹79,217 crore.
The RBI’s recent warning highlights the need for banks to address gaps in their accounting practices related to gold loans. The regulator has given banks a three-month window to implement corrective measures or face supervisory action. It has directed lenders to closely monitor their gold loan portfolios, particularly in light of irregular practices uncovered during reviews.
Concerns have been raised about how some lenders are managing these loans. The RBI’s inspection revealed instances of hiding bad loans and “evergreening” practices—where loans are topped up or rolled over without proper appraisal. This not only poses risks to the financial health of lending institutions but also threatens the stability of the broader financial system.
The RBI has identified several key deficiencies in the gold loan process, including inadequate due diligence and a lack of transparency in how gold valuations are conducted. In many cases, the valuation of gold was performed without the borrower being present, especially when loans were sourced through fintech partnerships. Furthermore, there have been alarming reports of multiple loans being granted to the same individual using the same PAN, raising red flags about responsible lending practices.
Gold loans have gained popularity, especially among individuals who find it difficult to access traditional financing options. They are often seen as a last resort for those in need of quick cash. The rise in gold prices—up approximately 29% this year according to a UBS report—has also fueled demand for these loans, making them an attractive option for borrowers looking to leverage their gold assets.While the gold loan sector has flourished, it has outpaced growth in other lending categories. The overall growth rate for the NBFC industry stands at 12% year-on-year, making gold loans a standout segment. Additionally, other areas of rapid growth include loans for new and used cars, personal loans, and home loans, which together show a diverse landscape for lending in India.The RBI’s actions underscore the importance of proper governance and monitoring in safeguarding the financial system. By insisting on transparent practices and thorough due diligence, the central bank aims to prevent a build-up of bad debts linked to the burgeoning gold loan market.
In conclusion, while the gold loan sector has shown impressive growth, the RBI’s intervention serves as a crucial reminder for lenders to prioritize responsible lending and maintain robust oversight. As the financial landscape evolves, ensuring the integrity of these lending practices will be vital for the stability of both the banking sector and the economy as a whole. The next few months will be critical for banks as they work to comply with RBI’s directives and strengthen their gold loan operations.