The Finance Ministry has requested that all state-owned banks examine the loans they have made in gold after observing instances of non-compliance with regulatory standards. The heads of public sector banks were contacted by the Department of Financial Services (DFS), a division of the Finance Ministry, requesting an examination of their gold loan system and procedures.
In response to a letter sent by DFS on February 27, all state-run banks were required to examine each gold loan account opened after January 1, 2022. The DFS requested that the banks evaluate the gold loan accounts' collateral value, examine the collection costs, and determine whether any evergreening had occurred.
"We have asked banks to undertake a comprehensive review of the gold loan business," Financial Services Secretary Vivek Joshi told news agency PTI.
The circular was released as a result of an increase in gold loans year over year. Loans secured by gold increased by 17% while the price of the yellow metal increased by 16.6%. As of January 26, loans secured by gold jewelry were Rs 1.01 lakh crore. The Finance Ministry has made it clear that it issued the decision after observing instances of non-compliance with the gold loan portfolio. As of December 2023, the largest lender in the nation, State Bank of India (SBI), alone had Rs 30,881 crore in gold loans.
At the end of the third quarter, Bank of Baroda had a gold loan exposure of Rs 3,682 crore, while Punjab National Bank's was at Rs 5,315 crore. Only 75% of the jewelry's worth may be provided by banks or gold loan financing companies in accordance with RBI regulations. To lessen hardship, relaxation was offered throughout the COVID-19 period.
The Reserve Bank of India placed restrictions on IIFL Finance Ltd. last week, ordering it to cease authorizing and paying out gold loans as well as assigning, securitizing, and selling any of its gold loans. The RBI stated in its order that IIFL was permitted to carry on servicing its current gold loan portfolio using the customary procedures for collection and recovery.
According to the RBI, 67% of the gold loan accounts at IIFL Finance had a gold loan-to-value ratio deviation during a recent audit. Eighty-two thousand of the 18.9 lakh gold loans that IIFL provided in FY23 have been put up for auction as a result of borrower default. An RBI review of these 82,000 accounts revealed that 55,000 of them had differences at the time of the auctions.
In addition, Reserve Bank of India has requested that IIFL limit its cash payouts to Rs 20,000 as opposed to its previous policy of up to Rs 2 lakh. In response, IIFL stated that after the ban on lending for gold is lifted, it will abide by the legal cap.
The length of the restriction will determine how it affects IIFL Finance's finances, but the company has committed to resolving the RBI's concerns and getting everything back to normal, according to a Motilal Oswal report. But there are a lot of hazards. If the ban stays in place, there might be an erosion of the gold loan portfolio and employee churn.
