Flagging irregular practices by some supervised entities (SE) such as banks and NBFCs in grant of loans against gold ornaments and jewellery, the Reserve Bank of India (RBI) on Monday asked them to identify gaps and initiate appropriate remedial measures in a timebound manner. 

“The RBI recently carried out a review of the adherence to prudential guidelines as well as practices being followed by SEs with regard to loans against pledge of gold ornaments and jewellery. The review, as well as the findings of the onsite examination of select SEs by the Reserve Bank, indicate several irregular practices in this activity,” the banking regulator said in a circular.  

The major deficiencies include shortcomings in use of third parties for sourcing and appraisal of loans, valuation of gold without the presence of the customer, inadequate due diligence and lack of end use monitoring of gold loans, lack of transparency during auction of gold ornaments and jewellery on default by the customer, weaknesses in monitoring of LTV, and incorrect application of risk-weights, it said. 

Asking the SEs to “immediately mend their ways”, the RBI directed them to closely monitor the gold loan portfolio, especially in the light of significant growth in the portfolio in certain SEs. 

“It should also be ensured that adequate controls are in place over outsourced activities and third-party service providers. Action taken with regard to the above may be informed to the senior supervisory manager (SSM) of Reserve Bank within three months of the date of this circular,” the RBI said. 

Non-compliance with regulatory guidelines in this regard will be viewed seriously and will attract, among other things, supervisory action by RBI, it said. The circular has come into immediate effect.