Finance Ministry Urges State Banks to Review Gold Loan Portfolios

The Finance Ministry has issued a directive to all state-owned banks, urging them to conduct a thorough review of their gold loan portfolios in response to observed instances of non-compliance. The Department of Financial Services (DFS), a division of the Finance Ministry, communicated this instruction to the heads of public sector banks, emphasizing the need for meticulous evaluation.

According to the directive, banks are required to scrutinize each gold loan account issued after January 1, 2022. The objective is to assess the value of collateral, examine collection charges, and ensure adherence to loan extension protocols. This move comes amidst a notable surge in gold loans, with a 17% increase reported compared to the previous year.

Financial Services Secretary Vivek Joshi underscored the importance of a comprehensive review, stating, "We have asked banks to undertake a comprehensive review of the gold loan business." The surge in gold loans, amounting to Rs 1.01 lakh crore as of January 26, reflects a significant uptick in borrowing against gold jewellery, accompanied by a rise in gold prices.

The directive aligns with RBI norms, which stipulate that banks or gold loan finance firms can lend up to 75% of the value of the jewellery. However, relaxations were provided during the COVID-19 period to alleviate financial hardships.

Recent regulatory actions by the Reserve Bank of India (RBI) underscore the importance of adherence to lending norms. Restrictions imposed on IIFL Finance Ltd, prohibiting gold loan disbursements and imposing cash withdrawal limits, highlight the regulatory scrutiny in the sector.

RBI's decision to restrict IIFL Finance's gold loan activities follows deviations in the gold loan-to-value ratio observed in a significant percentage of accounts, along with borrower defaults leading to auction proceedings. The company has expressed its commitment to complying with regulatory directives and addressing concerns raised by RBI.

As state-owned banks embark on reviewing their gold loan portfolios, regulatory compliance and risk mitigation emerge as key priorities. The Finance Ministry's directive underscores the government's vigilance in ensuring the stability and integrity of the banking sector amidst evolving market dynamics.