The Reserve Bank of India (RBI) has identified several irregularities in the gold loan process, particularly with Non-Banking Financial Companies (NBFCs). Following an in-depth investigation, the central bank issued a circular on September 30, giving these companies three months to resolve the issues. The rise in the volume of gold loans in recent years, with a 25% growth between 2020 and 2024, has prompted stricter oversight from the RBI.
With the gold loan market growing fast, borrowers need to understand the process fully before committing. If you are planning to take a gold loan, here are some important things to keep in mind.
What Did the RBI Find?
The RBI discovered several flaws in the way gold loan companies operate. One of the key issues is the use of third-party agencies for gold valuation without the customer being present during the process. This lack of transparency also extends to the auctioning of gold jewelry when customers fail to repay their loans. Additionally, many NBFCs are weak in monitoring the loan-to-value (LTV) ratio, which can lead to a misuse of risk weight rules.
Another major issue is the non-compliance with Know Your Customer (KYC) regulations, with some NBFCs relying on fintech companies for verification without conducting proper physical checks. Moreover, some companies extend the loan period by collecting small payments, which may not fully benefit the customer in the long run.
What Should You Check Before Taking a Gold Loan?
1. Research the Lender
When considering a gold loan, ensure that you approach a bank or NBFC that adheres to RBI guidelines. Look for companies with a solid reputation and a history of transparent practices. Compare interest rates and any hidden charges to avoid future complications. Checking customer reviews can also help in evaluating the credibility of the lender.
2. Understand the Loan Terms
It’s important to thoroughly understand the terms and conditions of the gold loan before signing any agreement. Be clear on the loan tenure, repayment terms, and the LTV (Loan-to-Value) ratio, which indicates how much loan you can get against your gold. The RBI has capped the LTV ratio at 75%, so ensure your lender follows this rule. Higher LTV ratios may seem attractive but could lead to risks if the gold’s value decreases.
3. Know the Valuation Process
A critical part of taking a gold loan is the valuation process. Make sure you are present when the bank or NBFC evaluates your gold. This will help ensure transparency and give you confidence that the valuation is accurate. Be cautious of companies that use third-party agencies for valuations without your involvement, as this can lead to discrepancies in determining the value of your jewelry.
4. Be Aware of Auction Rules
If you fail to repay the loan, your pledged gold could be auctioned by the lender. It is important to know the auction process beforehand. Understand the time frame before your gold will be auctioned and the rules surrounding it. This will help you avoid unpleasant surprises if you face difficulties repaying the loan.
5. Ensure Proper KYC Compliance
Make sure the lender follows proper KYC norms as per RBI regulations. Avoid lenders who rely solely on fintech companies for verification without any physical checks. Proper KYC procedures ensure that you are dealing with a legitimate institution that follows the law.
Final Thoughts
As the RBI continues to keep a close eye on the gold loan sector, borrowers should take extra care when applying for a loan. By understanding the process, from valuation to repayment, and ensuring your lender follows all RBI norms, you can safeguard yourself against potential issues down the line.
