Why the surge in gold loans raises red flags

livemint.com:

IIFL Finance, the country’s second-largest gold loan non-bank finance company (NBFC), from disbursing fresh gold loans. This comes on the heels of the finance ministry last month asking all banks to review their gold loan portfolios, according to news agency PTI. The ministry flagged issues strikingly similar to the IIFL case, including inadequate collateral, repayments in cash, and problems around collection of fees.

In the IIFL case, the central bank found “serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default; breaches in loan-to-value ratio; significant disbursal and collection of loan amount in cash far in excess of the statutory limit; non-adherence to the standard auction process; and lack of transparency in charges being levied to customer accounts, etc." Gold loans, once a mainstay of mainly NBFCs, soared during covid, which affected life in India from March 2020 onwards, and its aftermath. Families, without access to credit otherwise, put up gold ornaments and possessions as collateral for loans at a time when other sources of income dried up. The incentive to take gold loans was driven by two factors.

One, a move by the RBI to increase the loan-to-value ratio of non-agricultural gold loans from 75% to 90%. Thus, for ₹100 worth of gold, lenders could issue a loan worth ₹90, against ₹75 previously. Two, a sharp jump in the price of gold itself.