Brisk growth in gold loans likely behind RBI warning

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Subscribe to enjoy similar stories. The Reserve Bank of India’s (RBI) caution on gold loans is likely on account of the brisk growth in the segment, analysts said, but a secured asset class like bullion would still present fewer risks than what was seen in personal loans. On Monday, the regulator flagged deficiencies in gold-lending practices in using third-party agencies, besides inadequate due diligence and monitoring of end use of funds.

Outstanding gold loans grew 41% year-on-year (y-o-y) in August to ₹1.4 trillion, according to data from RBI. The growth rate was double of what was recorded in August last year. So far, this financial year, gold loans are up 37%.

Reacting to the RBI notification, shares of gold loan companies Muthoot Finance and Manappuram Finance closed 3.7% and 1.9% lower, respectively, on Tuesday. “A robust increase in gold prices has pushed up the loan book growth in the recent past, which in turn, has brought the segment under spotlight," said A.M. Karthik, senior vice-president & co-group head, financial sector ratings, Icra.

Karthik said that in the case of gold loans, one must remember it is a secured asset class targeted towardsretail and agri borrowers. Such lending, however, is highly regulated around various operational aspects, including branch opening, collateral evaluation and storage, auction process, among others, he said. The RBI found several violations in gold loans advanced through partnership with fintechs and business correspondents (BC), according to the regulator's notification on Monday.