India’s central bank set to ask lenders to tighten gold loan processes, sources say

MUMBAI/NEW DELHI: India’s central bank plans to ask lenders to follow stricter underwriting processes for gold loans and monitor the end-use of funds as it tries to cool growth in the fast-growing segment, seven people, including industry sources and those aware of the regulator’s thinking, said.

The Reserve Bank of India wants banks and non-banks to also bolster background checks on borrowers and ascertain the ownership of the gold that is being mortgaged, according to the sources, who did not want to be identified as they are not allowed to speak to the media.

“The RBI wants to ensure that the entities are following a standard protocol and any growth in the gold loan sector is not out of bounds,” one of the sources aware of the central bank’s thinking, said.

“It wants to make sure that any unethical business practices are curbed and financial stability is protected.”

The RBI did not immediately reply to a Reuters email seeking comment.

Since September 2024, banks’ gold loans have been rising by 50%, sharply outpacing the growth in overall loans, bolstered in part by tighter norms for unsecured lending.

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In India, the world’s second-biggest consumer of the precious metal, households typically buy gold during festivals and weddings. Record prices make gold loans more attractive.

In September, the central bank said it found several irregular practices in the gold loan industry and asked lenders to comprehensively review their lending processes to identify and address regulatory lapses.

The RBI has identified shortcomings in the sourcing of loans as well as the appraisal and gold valuation and “not all entities are following the standardised rules”, a source aware of the central bank’s thinking said.

In audits conducted over the last 12-to-16 months, the RBI found irregularities in the portfolios of non-bank lenders and weaknesses in monitoring the amount of funds that can be lent against gold, two of the sources said.

It also found that fintech agents of banks were collecting gold, storing and weighing it, tasks that lenders are meant to handle, one of the industry sources said.

Lenders were also auctioning gold without informing borrowers who had defaulted, the person said.

The regulator aims to treat all lenders uniformly to ensure no entity bypasses regulations, including for gold auctions and monitoring use of the loaned money through receipts, a second industry source said.