MUMBAI: The Reserve Bank of India (RBI) has flagged several deficiencies in the rapidly growing gold loan segment, and has mandated the lending entities to reassess their gold loan policies within three months.
The RBI’s review revealed several deficiencies in how loans against gold ornaments and jewellery are managed.
Issues such as improper valuation processes, inadequate due diligence, and lack of transparency during auctions were identified as key issues, prompting the central bank to mandate that supervised entities reassess their gold loan policies.
Low capital key feature
It is a fact that the gold loan market has attracted both banks and non-banking financial companies (NBFCs), drawn by the low capital requirement and perceived minimal risk associated with gold-backed lending.
The central bank has pointed out critical lapses that could jeopardise the financial integrity of institutions, including poor monitoring of loan-to-value (LTV) ratios and inadequate checks on the end-use of funds.
The market of late has seen fierce competition as banks vie for market share against specialised gold loan companies.
Competition intensifies
There are banks like CSB bank that have built close to 50 per cent of their loan book with gold loans alone.
The specialised gold loan companies often offer quicker processing times and more flexible terms, appealing to customers who need immediate funds.
“Banks are increasingly adopting aggressive strategies to retain customers, which can sometimes lead to lapses in adherence to regulatory guidelines,” head of credit atf a bank acknowledged to businessbenchmark.news.
Fintech partnerships rising
The RBI’s circular underscores that the rush to capture market share should not come at the expense of robust risk management practices. The growing competition between traditional banks and dedicated gold loan providers has intensified the need for stringent oversight.
In order to grab market share and to remain efficient in the market, many banks are now exploring partnerships with fintech companies to streamline their gold loan services.
