RBI Cracks Down on Gold Loan Irregularities: Stricter Regulations on the Horizon

The Reserve Bank of India (RBI) is preparing to enforce stricter rules on gold loans to curb their rapid expansion. Financial institutions, including banks and non-bank lenders, will need to tighten their lending processes and improve oversight on how borrowed money is utilized, according to sources familiar with the matter. The move is aimed at ensuring financial stability and curbing unethical lending practices.

Background Verification and Ownership Checks

A key focus of the RBI’s proposed measures is strengthening background verification of borrowers and confirming the ownership of the gold used as collateral. According to sources, the regulator wants to ensure that all financial institutions follow standard protocols to prevent irregularities and loopholes in the gold loan sector.

Surge in Gold Loans Amid Stricter Unsecured Loan Rules

Gold loans from banks have surged by 50% since September last year, far outpacing the overall loan growth rate. This sharp increase has been attributed to stricter regulations on unsecured loans, making gold-backed borrowing a more attractive alternative. India, the world’s second-largest gold consumer, sees a high demand for gold purchases, especially during festivals and weddings. The rise in gold prices has further driven people to use their gold assets as collateral for loans.

Regulatory Concerns and Identified Irregularities

The RBI has been closely monitoring the gold loan sector and has identified several regulatory lapses. In September, the central bank directed lenders to conduct a thorough review of their lending processes. Key concerns included shortcomings in loan sourcing, gold appraisal, and valuation practices, with not all institutions adhering to standard procedures.

RBI audits conducted over the last 12 to 16 months uncovered irregularities in the gold loan portfolios of non-bank lenders. The audits also highlighted weaknesses in monitoring loan disbursements against gold collateral, raising concerns over the potential misuse of funds.

Concerns Over Fintech Involvement and Auction Practices

A major issue flagged by the RBI is the involvement of fintech agents in gold loan operations. These agents have been handling crucial tasks such as gold collection, storage, and weighing—responsibilities that should be performed by the lending institutions themselves.

Additionally, some lenders were found to be auctioning pledged gold without properly informing defaulting borrowers. This practice raises legal and ethical concerns, prompting the RBI to push for uniform regulations across all lending entities.

Ensuring Uniform Regulations for All Lenders

The central bank aims to create a level playing field by enforcing uniform regulations for all financial institutions involved in gold lending. The goal is to prevent any entity from bypassing regulations, particularly in areas such as gold auctions and monitoring loan usage through proper documentation. By implementing these measures, the RBI seeks to protect borrowers and maintain financial discipline in the gold loan market.

While the RBI has yet to issue an official statement regarding these proposed changes, industry insiders suggest that new guidelines could be introduced soon to strengthen regulatory oversight and ensure compliance across the sector.

Published on: Friday, March 07, 2025, 11:50 AM IST