RBI Asks Internal Auditors To Verify Lender Compliance With Gold Loan Circular

According to two bankers in the know, the regulator has held one-on-one meetings with chiefs of various lenders to ensure that its directive to comply with tighter checks on gold loans is met.

Regulated lenders were expected to submit compliance with the Sept. 30, 2024 circular before Dec. 31, 2024. Since then, the RBI is seeking verification of these compliance reports from internal auditors. Given internal auditors have an independent function within the bank, being excluded from regular business activity, they would be able to give a clear opinion on compliance, a top official at a private sector bank said.

On the basis of the internal auditors' report, the supervisory teams at RBI may take punitive action against non-compliant lenders. According to the second banker quoted above, the regulator feels that it has given adequate time to banks to comply with all the issues it highlighted on Sept. 30.

According to two bankers in the know, the regulator has held one-on-one meetings with chiefs of various lenders to ensure that its directive to comply with tighter checks on gold loans is met.

Regulated lenders were expected to submit compliance with the Sept. 30, 2024 circular before Dec. 31, 2024. Since then, the RBI is seeking verification of these compliance reports from internal auditors. Given internal auditors have an independent function within the bank, being excluded from regular business activity, they would be able to give a clear opinion on compliance, a top official at a private sector bank said.

On the basis of the internal auditors' report, the supervisory teams at RBI may take punitive action against non-compliant lenders. According to the second banker quoted above, the regulator feels that it has given adequate time to banks to comply with all the issues it highlighted on Sept. 30.

If lenders are unable to duly comply within six months, action is warranted a senior official at a public sector bank said. Already, banks have tightened certain risk parameters, including closer watch on end-use of funds, this banker added. Lenders are also ensuring that they have better checks in place to better value the gold pledged.

Queries mailed to RBI were not immediately responded to.

According to the two bankers quoted above, while all lenders are required to check the ownership of gold before accepting a pledge already, they usually take a signed declaration from a borrower. This is because it is challenging to verify ownership independently, as borrowers don't always have the necessary paperwork.

Lenders usually seek Know-Your-Customer documents from the borrower and a signed statement that they are true owners of this jewellery. In case the ownership is later disputed, the lenders hand over the jewellery to the local police as a case of fraud, with the borrower's details.

On Sept. 30, 2024, the RBI issued a circular taking aim at gold loan business at banks and NBFCs. In the circular, the regulator said that in its recent supervisory checks it had noted operational gaps at these lenders. This included, inadequate due diligence of borrowers and lack of end use monitoring, weak monitoring of loan to value ratio and incorrect application of risk weights.

"All SEs (supervised entities) are, therefore, advised to comprehensively review their policies, processes and practices on gold loans to identify gaps, including those highlighted in this advice, and initiate appropriate remedial measures in a timebound manner," RBI had said in its circular.

Further, the regulator said that the gold loan portfolio should be closely monitored, especially in light of significant growth in the portfolio. RBI also sought better controls over outsourced activities and third party service providers.

In January, loans extended by banks against gold jewellery rose 77% year-on-year to Rs 1.78 lakh crore. It is currently the fastest growing loan book among banks, according to RBI's monthly sectoral data.