Finance ministry wants state-run banks to review gold loan process amid rise in accounts, says report 

The Union Finance Ministry has ordered public sector banks to review gold loan processes amid worries that risky debt might have given a rally in prices of the yellow metal, a report said. The government and regulators are worried that the surge in gold prices might have prompted lenders to give away top-up loans over existing debt, sources told the Economic Times.

The Department of Financial Services (DFS), which is part of the Finance Ministry, in a letter issued on February 27, asked all state-run banks to review every gold loan account issued after January 1, 2022. The DFS wants the banks to assess the collateral value of the gold loan accounts, analyse collection charges and check if there has been any evergreening.

The circular was issued on the back of a rise in gold loans on a year-on-year basis. There was a 17% rise in gold loans vis-a-vis 16.6% rally in the yellow metal's prices. Loans against gold jewellery stood at Rs 1.01 lakh crore as of January 26. In comparison, gold prices have touched Rs 66,880.00 per 10 grams on March 7. The Finance Ministry has clarified that it had noticed instances of non-compliance regarding the gold loan portfolio and had hence issued the directive.

The Finance Minister in the letter noted that there were major concerns over the way the gold loans are disbursed without requisite gold collateral. It said that anomalies observed in collection of fees and of interest applied to the gold-loan accounts and closure of the account.

Earlier this week, the Reserve Bank of India barred IIFL Finance Ltd to stop sanctioning or disbursing gold loans or assigning, securitising, or selling any of its gold loans. IIFL, however, can continue to service its existing gold loan portfolio through the usual collection and recovery processes, the RBI said in its order.

RBI said in its recent audit it found gold loan-to-value ratio deviation in 67 per cent of the gold loan account at IIFL Finance. Of the 18.9 lakh gold loans extended by IIFL in FY23, 82,000 accounts have gone for auction due to default by the borrowers. Of these 82,000 accounts, RBI inspection has found deviation in 55,000 accounts at the time of auctions.

RBI has also asked IIFL to cap its cash disbursements at Rs 20,000 against the earlier practice of disbursing up to Rs 2 lakh. In reply, IIFL said it will comply with the statutory limit once the freeze on gold loan business is removed.