Gold Loans Under Fire | RBI Flags Major Issues | RBI Tightens Gold Loan Rules |How Are You Affected?

The Reserve Bank of India just issued a circular that’s shaking up how banks and financial institutions handle gold loans. If you have ever taken out a gold loan or are considering one, this matters to you.

So, what’s going on? After a detailed review, the RBI found some major issues with how gold loans are being managed across banks, non-banking financial companies, and cooperative banks. Here are some of the key takeaways:

First up, transparency or lack of it. A major problem flagged was that some banks were valuing gold without the customer even being there. Imagine handing over your precious jewellery and not knowing how it’s being appraised...now that’s a big trust issue. Even worse, the transportation of gold to the bank branch was found to be delayed and insecure in many cases.

Second, poor follow-up on loan usage. For non-agricultural loans, the RBI found that many institutions weren’t really checking how borrowers were using the funds. This lack of due diligence opens the door to misuse of loans, which is a big no-no.

Third, weak governance. Ever heard of someone taking out multiple gold loans at the same bank? Well, that’s happening too often. Banks were giving out an unusually high number of loans to the same individuals, suggesting lax oversight. And then, there's the problem of 'rolling over' loans, where borrowers keep extending their loans without paying them off. All this points to weak governance at these institutions.

Another red flag would be low transparency in auctions. When customers default, their gold is often auctioned off, but the review found that many people weren’t getting fair returns for their collateral. In short, customers were losing out.

Lastly, cash disbursement issues. Some entities were handing out gold loans in cash, way more than the limits set by law. Now that’s a huge risk, especially with the Income Tax Act in place.

With gold prices reaching record highs, the demand for gold loans from banks has risen significantly in recent months. According to RBI data, gold loan outstanding has surged 40% to Rs 1.32 lakh crore as of July end, compared with over Rs 95,000 crore in the year-ago period.

Now, the RBI has asked gold loan providers to submit an action report to the senior supervisory manager of the central bank within three months. And If they don’t, they could face some serious penalties. So, if you're thinking about a gold loan, it's crucial to stay informed and ask the right questions before putting up your gold in such institutions or banks.
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