The Finance Ministry has issued a notice to all state-owned banks, urging them to review their gold loan portfolios due to instances of non-compliance observed by the government.
The Department of Financial Services (DFS), a part of the Finance Ministry, wrote a letter to the heads of public sector banks, instructing them to examine their procedures concerning gold loans.
Initially, DFS sent out a letter on February 27, mandating all state-run banks to scrutinize each gold loan account issued after January 1, 2022. The aim was for banks to evaluate the value of collateral in these accounts, study collection charges, and ensure there has been no improper extension of loans.
"We have asked banks to undertake a comprehensive review of the gold loan business," said Financial Services Secretary Vivek Joshi to news agency PTI.
This move comes amid an increase in gold loans compared to the previous year.
As of January 26, loans against gold jewelry amounted to Rs 1.01 lakh crore, marking a 17 percent surge from the previous year, alongside a 16.6 percent rise in gold prices.
The Finance Ministry clarified that it had observed instances of non-compliance regarding the gold loan portfolio, prompting this instruction.
State Bank of India (SBI), the country's largest lender, holds a gold loan portfolio of Rs 30,881 crore as of December 2023. Similarly, Punjab National Bank's gold loan exposure stands at Rs 5,315 crore, and Bank of Baroda's is Rs 3,682 crore as of the third quarter.
According to RBI norms, banks or gold loan finance firms are only permitted to lend up to 75 percent of the value of the jewelry. However, relaxations were provided during the COVID-19 period to alleviate hardship.
Recently, the Reserve Bank of India imposed restrictions on IIFL Finance Ltd, prohibiting it from sanctioning or disbursing gold loans, among other activities.
This was in response to deviations in the gold loan-to-value ratio observed in a significant percentage of IIFL Finance's gold loan accounts, as highlighted in RBI's recent audit. Additionally, a considerable number of accounts have gone for auction due to borrower defaults.
RBI has instructed IIFL Finance to limit its cash disbursements at Rs 20,000, down from the previous limit of Rs 2 lakh. In response, IIFL stated its intention to comply with statutory limits once the freeze on the gold loan business is lifted.
While the impact of the ban on IIFL Finance's financials remains uncertain, the company has expressed its commitment to addressing RBI's concerns and restoring operational normalcy.
