Gold loans: RBI flags possible overvaluation by field agents

Gold loans are again in the news but for the wrong reasons. Reserve Bank of India (RBI) has expressed caution for banks about the gold loans being disbursed through fintech startups, The Economic Times has reported. Some of the major entities that source gold loans on behalf of banks are Rupeek, IndiaGold and Oro Money. The primary concern of the RBI lies with the evaluation process by the banks and fintechs, especially for gold sourced through field agents of companies.

In plain words, the field representatives who might be evaluating the gold pawned as the first step of sanctioning the loans might not have assessed the metal properly.

“The regulator has verbally expressed its concerns to a set of banks regarding this and asked them to take corrective actions immediately,” an official told the newspaper. The banks have promptly started acting on the caution and are discussing with fintech companies to address these apprehensions and, if need be, could also push a temporary pause button to the normal business process to ensure complete compliance.

The biggest gold loan sourcing company in India, Rupeek, is supported by investors such as Peak XV Partners and Accel. Its cofounder Sumit Maniyar told the newspaper that they have not yet received any communication to this effect from his company’s banking partners. “RBI has been closely scrutinising the gold loan business after the IIFL Finance issue. While banks may not have stopped disbursals through fintechs immediately, they are evaluating next steps closely,” said one of the officials the newspaper spoke to.

Needless to reiterate, the act of valuing the asset and sanctioning money against it is the most important part of gold loans. The disbursal is capped at 75% of the value of the gold given as collateral. An official said one of the apprehensions centres around the intensive involvement of field agents and overvaluation of the metal. “For fintechs, there is a first level of check that takes place at the doorstep of the customer. Subsequently, another round at the bank branch… The regulator may have found discrepancies between the two during their audits,” said the officer.

In some instances, fintechs also offer personal loans on top of the gold loan to meet the customer’s increased credit need. “The doorstep gold loan business has been going on for quite some time now and public sector banks also run it, so there should not be an issue with assaying standards followed by fintechs,” said an official.

Incidentally, on March 4 this year, RBI said there has been supervisory lapse by IIFL Finance in its gold loan business. Following the rap, IIFL has halted gold loans till completion of a special audit and rectification.

According to the newspaper report, a note by Crisil dated February 22 said the total AUM of Rupeek as of December 2023 stood at Rs 1,659 crore. The amount was Rs 1,669 crore in March 2023. The note also stated that loans due for more than 90 days worked out to 2.3% in December. In end-March it was 4.1%, signalling an improvement in the asset quality.

In the domain of gold loans, Rupeek works for Federal Bank, Indian Bank and South Indian Bank.

Indiagold’s partners include HDFC Bank, Axis Bank and Shivalik Small Finance Bank. “This sector has grown exponentially over the last few years, which has drawn the attention of the regulator, since banks are the ultimate lenders,” said one of the officials.

Federal Bank sanctioned Rs 25,085 crore of retail gold loans in the January-March period which was significant 17% higher than the Rs 21,425 crore in the corresponding period a year ago. Gold loans comprise the biggest component in this basket.

The gold loan disbursals of Axis Bank jumped at a compounded monthly growth rate of 94% in H2 of 2023-24.

RBI data showed that retail gold loans grew 15% to Rs 1 lakh crore in March 2024, compared to Rs 89,382 crore in the same period last year.