The Reserve Bank of India issued a circular on 30th September 2024 titled, “Gold Loans – Irregular Practices Observed in Grant of Loans Against Pledge of Gold Ornaments and Jewellery.” The instructions are for all banks and non-financial companies (NBFCs) except regional rural banks (RRBs) and payment banks. (Link to circular mailed) (For them, separate instructions are sent.)
This has come to public notice only now because, only in March, the Banks have sent notices to the Gold Loan borrowers to close their Gold Loan accounts. Farmers’ associations in Tamil Nadu have raised their voices after farmers complained to them. Gold loans are essential in the South as people buy more jewels as security, and wearing gold is also a cultural practice. In the North, there is not much of a gold loan business for banks, though pawnbrokers do exist there.
In October 2019, the Finance Ministry changed the norms for Agriculture Gold Loans and withdrew interest subvention, making Gold Loans costlier for farmers and women, who are the actual borrowers in large numbers.
Though the Banks were giving Agriculture Gold Loans after verifying land records, this government lamented that the loans were not really for agriculture and changed the scheme (Refer RR dated January 1, 2020).
Now, the irregularities pointed out by the RBI in Gold Loans are:
- Third-Party Reliance: They say that the Banks are using Business Correspondents (BCs) and Fintechs. It is the same RBI that initiated BCs into Banks, and now there are more than 19 lakh BCs, whereas regular employees in the Banking Sector (other than Co-op Banks) number only 10 lakhs. These BCs work under 392 National (Corporate) Business Correspondents, which include Muthoot Finance and Mallapuram Finance, who are money lenders and whose main business is Gold Loans.
As their income is so low, the RBI permitted them to do 32 types of banking transactions, including sourcing Gold Loans. What RBI should do is ask Banks to regularize them as Bank employees and train them to assist with Gold Loans. In the State Bank of India, the cash officers/Head Cashiers are trained to appraise gold and sanction Gold Loans. So, BCs can be trained too. Instead, the RBI is crying about them.
It is again the same RBI that permitted the Co-lending model, allowing Fintechs and NBFCs to have co-lending agreements with Banks to give loans. Instead of scrapping the Co-lending model, the RBI is making it impossible for small borrowers to avail themselves of Gold Loans.
- Inadequate Security in Transportation of Gold: It is again the RBI that permitted outsourcing of cash loading, transporting cash, and securities, which was earlier done by Bank employees, including Security Guards with guns. Now, they are crying about it but not revoking this outsourcing model.
- Absence of Monitoring the Activities of Third Parties: Who permitted third parties into the Banking system? Who permitted regular jobs to be done by contractors? Under the nose of the RBI, the regular employee strength in Banks has been drastically reduced in Public Sector Banks (RR dated February 17, 2025).
They have more than 2,000 customers to be taken care of by each Public Sector Bank employee as against 350 in Private Sector Banks. Naturally, all monitoring gets weakened. Will the RBI address this issue?
Under the nose of the RBI, the appointment of Employee Directors (Workmen and Non-Workmen) has been stopped for more than 10 years. This has weakened monitoring and made the Boards of Banks opaque. Will the RBI make efforts to rectify this?
- Loans Given Without the Presence of Borrowers: Due to the workload in Banks, the disbursal of loans takes time. Borrowers hand over the ornaments and leave, asking the Banker to credit the proceeds to their account. What is wrong with that?
Do the Corporate borrowers like Adani, Ambani, or Tatas ever visit the Bank for their loan and wait?
- Monitoring End Use of Funds in Agriculture Gold Loans is Lacking: Agri Gold Loans are given as Kisan Credit Cards. It is clearly established that the borrower is a farmer based on documentary evidence. After that, where is the time for the Banker to go and verify whether he is applying seeds or fertilizers using the Gold Loan? Where is the need?
Banks are encouraged and compelled by the RBI and Government to lend to NBFCs, who lend the money at a higher rate of interest. Who is monitoring the end use of funds?
- Evergreening of Loans Takes Place: What is wrong with it? A borrower takes a loan for different purposes, closes the loan, or renews the loan and repays this loan regularly. Why should this worry the RBI?
Cash Credit accounts are used by rich borrowers for evergreening. Corporates have more than one Term Loan at a time. Nobody raises an eyebrow. Why this stinted eye for the poor and middle class, who pledge their jewels for emergencies because Banks don’t have time and staff to lend to them?
- Valuation of Gold Not Done Correctly: Banks fix the rate of the loan as per the market price of gold. If there are stones, their weight is deducted. Gold prices are going up and up. Why should RBI worry? Corporates are given loans without security based on projected balance sheets. Parliament has been told that 29 borrowers with loan limits above Rs. 1,000 crores have not repaid more than Rs. 60,000 crores, and these have been written off.
RBI’s own data (BSR) shows that 449 borrowers have been given loans above Rs. 100 crores at less than 5% interest. Why? How? What valuation was done?
Banks have not lost any money in Gold Loans.
- Lack of Transparency: When there is no transparency while giving large loans, what do you expect for Gold Loans? It is the safest loan for the Banks. Why doesn’t the RBI demand the removal of the Secrecy clause in the RBI Act so that the names of borrowers whose loans have been written off are made public?
- Rapid Closure: A Gold Loan borrower borrows for emergencies. What is wrong with closing the loan earlier than a year? Why this crocodile tear? Banks do charge for premature closure.
The RBI also says loans should not be renewed with part payment but closed with full payment. No loan should be given to the borrower on the same day. This is injustice. The only way is to go to Pawnbrokers.
- Non-Compliance with Statutory Limits, Not Following Section 269SS of the IT Act, Risk Weight Application, Limit to Value (LTV), etc.: Banks have followed these norms, and if there is any violation, the RBI fines them. It is the NBFCs that do not follow, and the RBI does not have staff to monitor them. Crying alone is not enough.
What is to be Done?
- RBI should strengthen the system and withdraw instructions on lending to NBFCs, Co-lending, Outsourcing, Business Correspondents, etc.
- Implement its own decision that Banks together under a consortium should not lend more than Rs. 10,000 crores to one Corporate.
- The Government should amend the RBI Act and Banking Regulation Act to make Banks transparent in disclosing defaulter borrowers. It is the depositors who require secrecy, not the borrowers.
The present instructions of the RBI will force borrowers to go to NBFCs, Moneylenders, and Pawnbrokers, while Banks with huge deposits will lend to Corporates at cheap rates.
The Circular must be withdrawn immediately.
Thomas Franco is the former General Secretary of the All India Bank Officers’ Confederation and a Steering Committee Member at the Global Labour University.
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