RBI's new rules make gold loans harder to get
What's the story
The Reserve Bank of India (RBI) is planning to introduce stricter guidelines for gold loans.
The move, which aims to promote ethical business practices and ensure financial stability within the industry, comes in the wake of irregularities discovered during recent audits.
The proposed changes include more thorough background checks on borrowers and tracking of how funds are used.
Regulatory measures
RBI seeks to regulate gold loan sector's growth
The RBI is pushing banks and non-banking financial companies (NBFCs) to tighten their background checks on borrowers.
It also wants them to confirm the ownership of gold being pledged for loans.
This move is aimed at making sure that all players follow a strict standard protocol, preventing unchecked growth in the gold loan sector.
The central bank's aim is to curb unethical business practices and keep financial stability intact in this fast-growing industry.
Market trends
Gold loan demand surges amid festival season
Since September 2024, banks have witnessed a whopping 50% increase in gold loans.
The surge is attributed to stricter rules for unsecured lending and the festive season when households traditionally buy gold.
As the second-largest consumer of gold in the world, India sees a spike in demand during festivals and weddings.
However, record-high prices have also made gold loans more attractive to consumers.
Audit findings
RBI uncovers irregularities in gold loan sector
In September, the RBI had revealed that it had unearthed several irregular practices in the gold loan industry.
The regulator has asked lenders to review their lending processes thoroughly, to identify and rectify any regulatory oversights.
Over the last 12-16 months, audits have unearthed issues with non-bank lenders' portfolios and their ability to monitor how much money can be lent against gold.
Industry concerns
RBI finds lapses in gold loan industry practices
The RBI has flagged issues with the manner in which loans are sourced, along with issues with gold appraisal and valuation.
Not all entities are following standardized rules.
Further, audits revealed that fintech agents of banks were doing things like collecting, storing, and weighing gold—tasks usually performed by lenders themselves.
There have also been instances of lenders auctioning off gold without notifying defaulting borrowers.