The Dark Side Of Gold Loans

There Has Been A Sharp Rise In Gold Loans In Recent Years. But There Is A Seedier Side To This, As Is Evident From The Red Flag The RBI Raised Recently. Will The Regulator's Move Protect Customers?

- TEENA JAIN KAUSHAL

ON A SUNNY DAY IN MARCH, NIRMAL JAIN, MD OF FINANCIAL SERVICES COMPANY IIFL FINANCE, GOT A NOTICE FROM THE REGULATOR, THE RESERVE BANK OF INDIA (RBI).

THE RBI ASKED the company to immediately stop its gold loan operations, which accounts for a third of its business. The reason: the regulator found some major lapses in how the company handled the loans.

When the regulator looked into the company’s finances as on March 31, 2023, it found several lapses, like how the company checked the purity and weight of gold when giving out loans and during auctions after borrowers defaulted. It also found that IIFL Finance had given out and collected cash loans way above the statutory limit. It had not adhered to the standard auction process, and there was a lack of transparency in the charges being levied on customer accounts.

And IIFL Finance isn’t the only one under the scanner for concerns related to the gold loan book. Bank of Baroda’s internal audit found that many gold loan accounts were closed within one to three days, 238 were closed on the same day they were given, and 2,512 were opened and closed during a gold loan drive. When contacted, the bank said it had done a thorough check and found no discrepancy in the vast majority of cases. In fact, some of the bank’s branches reportedly disbursed gold loans without the collateral of gold as they scrambled to meet tough targets. A spokesperson for Bank of Baroda (BoB) said, “We would like to clarify that the bank has conducted an audit of its gold loan portfolio. We have found that all gold loans are adequately secured by gold jewellery as security.”