Mumbai (The Uttam Hindu): RBI Governor Sanjay Malhotra announced on Wednesday that the Reserve Bank of India (RBI) will soon issue comprehensive regulations addressing prudential norms and conduct-related aspects for gold loans, following concerns raised about the growing sector. The new guidelines will review lending practices where gold jewellery and ornaments are used as collateral for both consumption and income-generation purposes. The RBI has issued prudential and conduct-related regulations for such loans in the past, but these varied across different categories of regulated entities (REs). The new measures aim to harmonize these regulations while considering the risk profiles of these entities, as well as addressing concerns identified in the sector.
The draft guidelines are currently open for public comment. Following the announcement, shares of major gold loan firms, including Muthoot Finance, IIFL Finance, Manappuram Finance, and Cholamandalam Investment & Finance Company, saw declines of up to 7% on Wednesday. The RBI noted a significant surge in gold loans across the country, reflecting a rising reliance on gold as collateral to meet financial needs. According to an RBI report, gold loans saw considerable growth in the year ending September 2024 compared to the previous year.
However, the central bank also raised concerns over certain irregularities observed among supervised entities (SEs) involved in gold lending. To tackle these issues, the RBI issued guidelines in September 2024, urging SEs to review their policies, processes, and practices. Key gaps identified included deficiencies in outsourcing practices, discrepancies in gold valuation, inadequate due diligence, and insufficient monitoring of how loan funds were used. These new regulations are intended to ensure that the rapid expansion of the gold loan segment remains sustainable and free from malpractice. Non-Banking Financial Companies (NBFCs) dominate the gold loan market, holding a significant 59.9% share of total gold loans disbursed by both banks and NBFCs as of March 2024. This highlights their crucial role in serving borrowers who rely on gold jewellery and ornaments to secure loans.