Rolling Over Debt: Gold Loan Fintechs Might Be The Latest Weak Link

The Reserve Bank of India is concerned with certain lending practices of gold loan fintechs, four people told NDTV Profit. The regulator may release a fresh set of guidelines on gold loans by such companies, the people said on conditions of anonymity.

The practice of opening new accounts for rolling over a gold loan by these fintechs may be the new grey area, tantamount to evergreening, they said.

Given the current stringent regulatory environment, the RBI is concerned with such practices and may bring in new guidelines on gold loans in the next few weeks, which would be more explicit than the previous ones, one of the four people quoted above said.

Evergreening of loans refers to banks trying to revive a loan that is on the verge of default by granting further loans to the same borrower. Lenders provide more loans to stop them from turning into huge non-performing assets.

The banking regulator will likely take objection because the borrower is evergreening an existing loan, without repaying the old one, a person aware of the matter said. If and when gold prices tank, this practice may cause serious issues, the person added.

An email sent to the RBI, fintechs like Rupeek and Oro Money seeking a comment on the matter remained unanswered at the time of filing this story.

"Renewing loan at the end of tenure is considered only if there is no change in the risk profile of the customer i.e., no outstanding interest payment, no change in the credit report of the customer and no margin call on account of drop in gold prices adversely impacting LTV," Nitin Misra, co-founder at Indiagold said in an emailed response.

"This is done to prevent 'evergreening'," Misra said. Indiagold is a direct selling agent that carries out loan sourcing and processing activities for partner banks.

The talk of fresh set of guidelines on gold loans has come as the RBI on September 30 had advised lenders to review their policies, processes and practices in granting loans against pledge of gold ornaments.

The central bank had also asked lenders to submit a report to the senior supervisory manager of the RBI within three months, which is almost coming to an end.

Bank loan against gold jewellery rose over 56% on year to Rs 1.54 lakh crore in October, RBI data showed. It recorded more than 17% year-on-year growth in the same period a year ago and 51% on year growth in September.

This sharp surge in gold loans has come as the RBI in November 2023 increased risk weights on unsecured loans by banks and non-bank lenders.

This move drove several credit starved borrowers to opt for gold loans, which is considered secured and highly liquid.

Personal loans grew 13% on year to Rs 56.5 lakh crore in October against 30% on year growth to Rs 50 lakh crore in the same period a year ago.