The Reserve Bank of India (RBI) has uncovered several irregularities in the operations of gold loan companies.
In a circular issued on September 30, the central bank has directed these companies to resolve the identified issues within three months.
The rapid growth of gold loans, which has surged at a compound annual growth rate (CAGR) of 25% between FY 2020 and FY 2024, especially among banks, has prompted this scrutiny.
With gold loans becoming increasingly popular, it is important for consumers to understand what the RBI found and what they should be cautious about when applying for a gold loan.
Issues Identified by RBI
RBI raised concerns over several practices in the gold loan industry:
Third-party assessments: Companies are using third-party agencies to assess the value of customers’ gold without the customer’s presence.
Lack of transparency in auctions: If the customer fails to repay the loan, the jewelry auction process lacks transparency.
Weak loan-to-value (LTV) monitoring: Some companies are not properly adhering to LTV rules, potentially leading to riskier loans.
Misuse of risk weight rules: Companies are exploiting these rules for their benefit.
Inadequate KYC verification: Instead of physical verification, some companies are using fintech firms for Know Your Customer (KYC) compliance.
Loan tenure extensions: After the loan term expires, companies are extending it by accepting small amounts of money, which can be risky for customers.
RBI’s warning highlights the potential risks customers face if companies do not follow proper rules.
What to Consider Before Taking a Gold Loan
Research and Verify: Always choose an NBFC or bank that complies with RBI guidelines and has a good credit rating.
Check their interest rates and additional charges to avoid hidden fees and problems down the road.
Understand the Loan Terms: Ensure you understand the terms and conditions, including the loan tenure, repayment terms, and the loan-to-value ratio.
RBI has capped the LTV ratio at 75%, meaning the loan amount should not exceed 75% of the gold’s value.
Know the Valuation and Auction Process: It’s essential to be aware of how your gold will be valued and the process in case your gold is auctioned due to non-repayment. Understanding these details will help you avoid surprises later.
