Why in news?

The Reserve Bank of India (RBI) is introducing a framework for gold loans amid a sharp rise in gold loan outstanding and non-performing assets (NPAs).

The surge in gold prices has led to increased gold loan disbursals, with NPAs rising by 28.58% and loan outstanding by 27.26% over the past year. The new framework aims to regulate the gold loan segment and mitigate potential risks.

What’s in Today’s Article?

• Surge in Gold Loan NPAs
• RBI Flags Irregular Practices in Gold Loans
• Draft Guidelines Released
• The Attractiveness of Gold Loans

Surge in Gold Loan NPAs

• Gold loan NPAs rose sharply by over ₹1,500 crore to ₹6,824 crore as of December 2024, compared to ₹5,307 crore a year earlier.
• Break-up of NPAs
  • Commercial banks reported gold loan NPAs of ₹2,040 crore, up from ₹1,404 crore in December 2023.
  • NBFCs reported NPAs of ₹4,784 crore, compared to ₹3,904 crore last year.
• Gold Loan Outstanding Growth
  • Total gold loan outstanding of banks and NBFCs stood at ₹11,11,398 crore in December 2024, rising from ₹8,73,701 crore a year ago.
• Banks' Share
  • Commercial banks held the majority share with ₹9,23,636 crore in gold loan outstanding.

RBI Flags Irregular Practices in Gold Loans

• A review by the RBI revealed several deficiencies in gold loan practices, including:
  • Use of third parties for sourcing and appraisal without proper oversight
  • Valuation of gold in the absence of the customer
  • Inadequate due diligence and end-use monitoring
  • Lack of transparency in gold auctions after defaults
  • Weak monitoring of Loan-to-Value (LTV) ratio
  • Incorrect application of risk weights
• RBI Directives to Lenders
  • The RBI instructed banks and NBFCs to review their gold loan policies and processes, identify gaps, and take corrective measures within a set timeframe.
  • It also emphasized strict monitoring of the gold loan portfolio and greater control over outsourced activities and third-party service providers.
• Curbing Evergreening of Loans
  • Previously, borrowers could repledge jewellery by just paying interest, enabling indefinite loan extensions.
  • Post RBI intervention in September 2023, repledging now requires full repayment of principal and interest, making the process costlier and limiting loan evergreening.

Draft Guidelines Released

• On April 9, the RBI issued draft comprehensive guidelines for gold loans.
• Prohibited Collateral
  • Lenders are barred from granting advances against:
    • Primary gold/silver
    • Financial assets backed by primary gold/silver (e.g., ETFs, mutual fund units)
• Loan-to-Value (LTV) Cap
• For consumption gold loans, the LTV ratio must not exceed 75% of the gold’s value.
• Restrictions on Collateral Use
  • Gold used as collateral for income-generating loans cannot be used simultaneously for consumption loans.
• Ownership Verification
  • Lenders must verify and maintain records of the ownership of gold collateral. Loans should not be extended where ownership is doubtful.
• Tenor Cap for Bullet Repayment Loans
  • Consumption loans requiring bullet repayment (principal and interest due at maturity) are to be limited to a maximum tenor of 12 months.
• Operational Norms for Lenders
  • Lenders must:
    • Integrate gold loan policies with credit and risk frameworks
    • Set borrower- and sector-specific exposure limits
    • Ensure loans are linked to repayment capacity via due diligence
    • Monitor end-use of funds and maintain detailed records

The Attractiveness of Gold Loans

• Ease and Accessibility
  • Gold loans are attractive due to easy availability, minimal documentation, and quick processing.
  • PSU banks and major financial institutions offer instant loans with flexible repayment options.
• Higher Loan Value
  • The sharp rise in gold prices has enabled borrowers to secure higher loan amounts against their gold holdings.
• Cultural Significance and Emergency Use
  • Gold, often passed down through generations, is readily pledged during financial emergencies like medical or educational expenses.
• Economic Uncertainty and Stability of Gold
  • During economic slowdowns or uncertainty, gold is viewed as a stable asset, encouraging individuals to opt for gold loans.
• Digital Expansion
  • The rise of digital platforms and fintech solutions has made gold loans more accessible, even in remote areas, boosting their popularity.