Finance Ministry asks PSU banks to review their gold loan portfolio

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The Finance Ministry has asked all state-owned banks to review their gold loan portfolio after instances of non-compliance with regulatory norms were noticed by the government. The Department of Financial Services (DFS), which is part of the Finance Ministry, wrote to the heads of public sector banks and asked them to look at their system and processes related to gold loans.

DFS had first issued a letter on February 27 and all state-run banks were to review every gold loan account issued after January 1, 2022. The DFS wanted the banks to assess the collateral value of the gold loan accounts, analyse collection charges, and check if there has been any evergreening.

“We have asked banks to undertake comprehensive review of the gold loan business,” Financial Services Secretary Vivek Joshi told news agency PTI.

The circular was issued on the back of a rise in gold loans on a year-on-year basis. There was a 17% rise in gold loans vis-a-vis 16.6% rally in the yellow metal’s prices. Loans against gold jewellery stood at Rs 1.01 lakh crore as of January 26. The Finance Ministry has clarified that it had noticed instances of non-compliance regarding the gold loan portfolio and hence issued the directive.

The country’s biggest lender, State Bank of India (SBI) alone has a gold loan portfolio of Rs 30,881 crore as of December 2023.
Punjab National Bank’s gold loan exposure stood at Rs 5,315 crore while Bank of Baroda was at Rs 3,682 crore at the end of third quarter.
As per the RBI norms, banks or gold loan finance firms can provide only 75 per cent of the value of the jewellery. However, relaxation was provided during the COVID-19 period to mitigate hardship.

Last week, the Reserve Bank of India imposed curbs on IIFL Finance Ltd to stop sanctioning or disbursing gold loans or assigning, securitising, or selling any of its gold loans. IIFL, however, was allowed to continue to serve its existing gold loan portfolio through the usual collection and recovery processes, the RBI said in its order.

RBI said in its recent audit it found gold loan-to-value ratio deviation in 67 per cent of the gold loan account at IIFL Finance. Of the 18.9 lakh gold loans extended by IIFL in FY23, 82,000 accounts have gone for auction due to default by the borrowers. Of these 82,000 accounts, RBI inspection has found deviation in 55,000 accounts at the time of auctions.

RBI has also asked IIFL to cap its cash disbursements at Rs 20,000 against the earlier practice of disbursing up to Rs 2 lakh. In reply, IIFL said it will comply with the statutory limit once the freeze on the gold loan business is removed.

According to a report by Motilal Oswal, while the ban’s impact on IIFL Finance’s financials remains contingent on its duration, the company emphasizes its commitment to addressing the RBI’s concerns and restoring operational normalcy. However, risks loom large, including a potential erosion of the gold loan portfolio and employee attrition if the ban persists.

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