agencies
A few bad apples should not ruin the brunch, argues Tamal Bandyopadhyay. Early this month, the Reserve Bank of India directed IIFL Finance Ltd to cease and desist from sanctioning, disbursing and selling gold loans with immediate effect.
IIFL Finance, however, can continue with its existing gold loan portfolio and carry on the usual collection and recovery processes.
Why has the banking regulator taken such a step?
The RBI's inspection of IIFL Finance's gold loan book had revealed serious deviations in assaying and certifying the purity and net weight of the gold while sanctioning the loans and auctioning the yellow metal for recovering money from loan defaulters.
It had also found breaches in the loan-to-value (LTV) ratio, or the ratio of a loan against the value of the collateral (in this case, gold), given by the borrower.
The LTV for gold loans as personal loans is 75 per cent. The RBI had raised it to 90 per cent in 2020 after the outbreak of the pandemic for a period till March 2021.
Gold loans given for agriculture have always had 90 per cent LTV.
There have also been other regulatory violations, which affect the borrowers' interest and, in the process, the growth of the gold loan market.
Offering loans against gold — a business that a handful of non-banking financial companies (NBFCs) in south India such as Muthoot Finance Ltd, Manappuram Finance Ltd and Muthoot FinCorp Ltd have been engaged in — is now a popular product in almost every bank's portfolio.
The consumers, including those at the bottom of the pyramid, are open to monetising gold by taking loans from different financial intermediaries — something that was taboo in the pre-Covid world.
The banking regulator is not alone in keeping a close watch on the fast-expanding gold loan market from its perch. The finance ministry is keeping it company.
In fact, a week before the RBI acted against the NBFC gold lender, the finance ministry's Department of Financial Services wrote to public sector banks, seeking a comprehensive review of the gold loan accounts opened since January 2022. It has many concerns, including the quality of the collateral, interest cost and processing fees charged by the banks and early closure of many such loans.
It also wants to know whether the banks have been resorting to the evergreening practice — giving fresh loans to borrowers to prevent an existing loan from turning bad.
The government and the RBI's action comes against the backdrop of a healthy rise in gold loans and gold price in the past one year (17 per cent and 16.6 per cent, respectively).
