RBI Issues Circular on Gold Loan Practices

The Reserve Bank of India (RBI) has recently issued a circular addressing several significant issues in gold loan practices. Here are the key takeaways:

• Lack of Transparency: Banks were valuing gold without customers being present, leading to trust issues. Gold transportation was often delayed and insecure.
• Poor Follow-up on Loan Usage: Many institutions failed to monitor non-agricultural loan usage, leading to potential misuse.
• Weak Governance: Over-approval of loans to individuals and frequent rollovers highlighted insufficient oversight.
• Low Transparency in Auctions: Customers often didn’t receive fair returns during collateral auctions.
• Cash Disbursement Issues: Some entities exceeded legal cash limits, risking tax evasion.

Gold loans have surged, with outstanding loans rising 40% year-over-year to ₹1.32 lakh crore by July. RBI has mandated stricter compliance within three months, with potential penalties for non-compliance.

FAQs on Gold Loans

• Loan-to-Value Ratio: Banks typically offer 75% of gold’s market value as a loan, sometimes going up to 85%.
• Diamonds Not Accepted: Only the gold in your jewelry is considered for loans, excluding diamonds.
• Gold Price Fluctuations: If gold prices drop, the loan amount may be adjusted, requiring margin money from borrowers. Conversely, if prices rise, the loan amount could increase.
• Interest Calculation: Interest is calculated on the loan principal. For example, ₹75,000 at 10% for a year incurs ₹7,500 interest.
• Quick Processing: Gold loans are processed within minutes, often without needing a savings account.
• Default Consequences: After 90 days of non-payment, loans become NPAs, and gold may be auctioned. Banks often wait for favorable gold prices, especially for agricultural loans.