According to a report, the Union Finance Ministry has instructed public sector banks to review their gold loan processes due to concerns that risky debt may have contributed to the increase in gold prices. The government and regulators are worried that the surge in gold prices may have led lenders to provide top-up loans based on existing debt. To address this, the Department of Financial Services (DFS) issued a letter on February 27, 2024, asking all state-run banks to review gold loan accounts issued after January 1, 2022.
The DFS has requested banks to assess the collateral value of the gold loan accounts, analyze collection charges, and check for any instances of evergreening. This circular was issued in response to a year-on-year increase in gold loans, which rose by 17% compared to a 16.6% increase in gold prices. As of January 26, loans against gold jewelry amounted to Rs 1.01 lakh crore, while gold prices reached Rs 66,880.00 per 10 grams on March 7.
The Finance Ministry clarified that it had observed instances of non-compliance regarding the gold loan portfolio, leading to the issuance of the directive. The Finance Minister expressed concerns about the disbursement of gold loans without sufficient gold collateral and anomalies in the collection of fees, interest, and closure of accounts.
In a separate development, the Reserve Bank of India (RBI) has prohibited IIFL Finance Ltd from sanctioning or disbursing gold loans, as well as assigning, securitizing, or selling any of its gold loans. However, IIFL can continue to service its existing gold loan portfolio through regular collection and recovery processes. The RBI’s decision came after an audit revealed a deviation in the gold loan-to-value ratio in 67% of IIFL Finance’s gold loan accounts, with 82,000 accounts going for auction due to borrower defaults. Of these 82,000 accounts, 55,000 accounts were found to have deviations during the auctions. The RBI has also instructed IIFL to cap its cash disbursements at Rs 20,000, down from the previous limit of Rs 2 lakh. IIFL has stated that it will comply with the statutory limit once the freeze on its gold loan business is lifted.
In summary, the Union Finance Ministry has directed public sector banks to review their gold loan processes to address concerns about risky debt and the increase in gold prices. The RBI has also taken action against IIFL Finance Ltd due to deviations in the gold loan-to-value ratio and borrower defaults.
Banks should instruct to sanction gold loan on HAL marked gold ornaments strictly in the interest of Bank as well as accuracy.
What is HAL marked gold ornaments?
How can bankers assure that all hallmarked ornaments are genuine and can be accepted for lending?