Gold loans may soon come with EMI plans after RBI flags irregularities: Report

Banks and gold loan companies are planning to introduce monthly amortisation plans after the Reserve Bank of India (RBI) pointed out deficiencies in gold loan disbursals, according to an Economic Times report.

For this, the regulated entities could ask consumers to begin paying interest and principal in equated monthly instalments (EMIs) as soon as the loan resumes.

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Apart from this, lenders are also exploring the term loan route to give loans against gold.

This is because gold loan lenders earlier offer a bullet repayment gold loan option, where the borrower can repay the entire amount at the end of the loan tenure and not as per an EMI schedule.

They also had an option to make partial repayments as and when funds are available with the borrower, with the borrower paying off the entire principal and interest amount before the end of the loan’s tenure.

What were the deficiencies pointed out by the RBI?

The RBI pointed out irregularities in granting loans against gold ornaments and jewellery in a circular on September 30.

These were related to the sourcing of gold loans, valuation, due diligence, end-use monitoring, auction transparency, loan-to-value (LTV) ratio monitoring, and the application of risk weights.

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It also found that rolling over gold loans with only part payment was a deficient practice.

“The regulator’s diktat is clear, it wants lenders to examine the payment capacity of borrowers and not solely rely on the collateral,” the report quoted a senior banking official as having said. “It is also unhappy with allowing rollover of such loans with part payment, which could lead to some delinquencies when repayments come up. We are now structuring monthly payment options for gold loans.”

Banks disbursed ₹1.4 lakh crore as jewellery loans as of September 30, according to the report. This was a 51% rise, which is up from 14.6% during a year ago.

This was because of a significant rise in gold prices which enabled additional top-ups on existing collateral. Another reason was challenges on the availability of unsecured and microfinance loans which pushed borrowers to go for gold loans.

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