Banking News

gold loan book: PSU banks ordered to test purity of gold loan book

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The finance ministry ordered state-run banks to review gold loan processes amid fears about risky debt given a rally in prices of the metal, said people familiar with the matter. The worry is that the surge led to lenders giving top-up loans over existing debt, said people familiar with the matter.

In a February 27 letter to all PSU bank chiefs, the department of financial services (DFS), part of the finance ministry, has asked banks to review every gold loan account since January 1, 2022, assess the collateral value, analyse collection charges and check if there has been any evergreening.

The concern comes amid a 17% rise in gold loans on a year-on-year basis and a 16.6% rally in the yellow metal’s prices. Loans against gold jewellery stood at ₹1,01,934 crore as of January 26 and gold prices have touched a high of ₹65,140 per 10 grams on March 5. The finance ministry stated that it had noticed instances of non-compliance regarding the gold loan portfolio and had hence issued the directive.

Concerns have been raised “regarding the disbursement of gold loans without requisite gold collateral, anomalies observed in collection of fees and of interest applied to the gold-loan accounts and closure of the account either on the same day or within a few days of disbursement, at times by repayment in cash,” the finance ministry said in the letter, which ET has reviewed.

PSU Banks Ordered to Test Purity of Gold Loan Book

Letter sent before RBI directive to IIFL Fin
The communication was sent before the Reserve Bank of India (RBI) banned IIFL Finance from giving any new gold loans due to lapses in the lending process on March 4. The gold loan portfolio accounted for nearly 32% of IIFL Finances’ total assets under management at the end of December 2023.In the letter, the DFS asked banks to audit the gold loan portfolio, including accounts disbursed and closed in the last two years (January 2022 to January 2024). It even asked banks to verify the basic process, whether the collateral gold was obtained from borrowers against the loan amount disbursed. It also asked banks to verify whether the purity and value of the jewellery were accurately assessed and documented in accordance with RBI guidelines.Concerned over evergreening of gold loans, the finance ministry has asked banks to analyse the collection of charges such as processing fees and interest applied. This exercise should be undertaken to ensure that fees and interest were collected from the borrower, the letter stated.

The DFS has also asked banks to verify if there were any irregularities on loan accounts that were closed in the last two years. They have to identify those closed on the day of disbursement itself, within 30 days of it, and between 31 and 90 days from the date of disbursement.

A banker said this analysis is probably being sought to verify if some branches tried to boost the gold loan book to meet lending targets. Banks have also been asked by the DFS to verify if the interest applied on such accounts was actually recovered from the borrowers or if it was recovered from the office account of the banks.

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