The gold loan portfolio of banks and NBFCs has sharply risen over the past four years, which may have attracted the scrutiny of the Reserve Bank of India (RBI) on gold loan companies.
Banks’ loans against gold jewellery have soared 206% to Rs 1 trillion at the end of the third quarter of the current fiscal, from Rs 33,257 crore at the end of FY20, while assets under management of the top three gold loan NBFCs have risen by 71% to Rs 1.14 trillion from Rs 66,925 crore.
“The last few years were very good for the gold loan business and companies tend to overlook compliance-related norms to meet targets. When the growth in any vertical is very high, it catches the attention of the banking regulator,” a senior bank official told FE.
A consistent rise in prices has helped banks and NBFCs to grow their business as higher prices of the yellow metal enable customers to get more value for their jewellery. Experts say the pandemic also benefitted the gold loan business as people pledged their jewellery with banks and gold loan firms to get funds to meet necessary expenses.
“In the urge to expand business, there is a tendency to dilute compliance norms about valuation, assessment of purity and weight of gold. The rules regarding the margin to be maintained by way of loan to value of the gold are also likely to be violated in some cases,” said Jyoti Prakash Gadia, managing director at Resurgent India. “As transactions are more prone to be in cash for the purchase of gold as also the utilisation of loan proceeds, violations in this respect are also possible.”
The regulatory and supervisory framework, therefore, needs to be robust to avoid any ballooning as earlier happened in the case of personal loans.
Representatives of NBFCs say gold loan companies are swift and present in those areas where banks do not operate.
“If a customer has required documents, he can get gold loan in 20-30 minutes. NBFCs’ turnaround time is better than most of the banks,” said Krishnan R, director and CEO, Unimoni Financial Services. The trajectory of gold in the past four years shows prices have only gone up, encouraging people to pledge gold to meet their personal or business needs, he added.