Defaults on gold loans get regulators worried

Are regulators and policy makers getting worried about the gold loan market? Earlier this month, the Reserve Bank of India (RBI) barred IIFL Finance, the second-largest gold loan non-bank finance company (NBFC) in the country, from disbursing fresh gold loans. The finance ministry, a PTI report said, had only last month asked banks to review their gold loan portfolios, flagging issues quite similar those in the IIFL case, including inadequate collateral, and repayments in cash.

In the IIFL case, the central bank found “serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default; breaches in loan-to-value ratio; significant disbursal and collection of loan amount in cash far in excess of the statutory limit; non-adherence to the standard auction process; and lack of transparency in charges being levied to customer accounts, etc.”

Gold loans, once the mainstay of mainly NBFCS, soared during covid, which affected life in India from March 2020 onwards, and its aftermath. Families, without access to credit otherwise, put up gold ornaments and possessions as collateral for loans at a time when other sources of income dried up.

Two factors acted as incentives to avail of gold loans. One, a move by the RBI to increase the loan-to-value ratio of non-agricultural gold loans from 75% to 90%. Thus, for ₹100 worth of gold, lenders could issue a loan worth ₹90, against ₹75 previously. Two, a sharp jump in the price of gold itself.