GOLD LOANS: SHINE UNDER SCRUTINY

RBI’s draft gold loan norms add gloss - with checks in tow

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The Reserve Bank of India (RBI) has released draft norms for lending against gold as collateral. Following this, shares of leading gold loan financiers - including banks and some non-banking financial companies (NBFCs) - have taken a hit on the bourses. The key concern for investors is that the proposed norms could impact growth in the sector.

The proposed regulatory enhancements aim to harmonize gold loan practices across lenders and increase transparency in the formal sector, which includes banks, NBFCs, and co-operative banks. These changes are set to strengthen the RBI's supervision of the gold loan market. However, they are also likely to introduce additional procedural burdens for the formal sector.

In many ways, the enhanced regulatory scrutiny of the gold loan market was expected. In September '24, the RBI had issued certain observations regarding irregular practices in the sector. Deficiencies flagged by the RBI included issues with loan sourcing and appraisal, gold valuation, loan monitoring practices, unverified end-use of funds, irregularities in topping up of gold loans, and the auction of gold on default. These concerns needed attention before they threatened the system.

As of September '24, gold loans outstanding across all RBI-regulated entities stood at ₹3.2 trillion, up from around ₹1 trillion at the end of March '20. The recent surge in the gold loan market has been fuelled by rising gold prices, prompting holders to monetize their assets. Gold prices currently hover around ₹95,000 per 10 grams (22 carat), compared to ₹55,000 per 10 grams in November '23.