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The finance ministry has directed all state-owned banks to review their gold loan portfolio as instances of non-compliance with regulatory norms have been noticed by the government.
The Department of Financial Services (DFS) in a communication addressed to heads of public sector banks has asked them to look at their system and processes related to gold loan.
"We have asked banks to undertake comprehensive review of the gold loan business," financial services secretary Vivek Joshi told PTI.
A directive in this regard was issued last month advising them to fix anomalies relating to collection of fees and interest and closure of gold loan accounts.
The letter flagged various concerns, including disbursement of gold loans without requisite gold collateral, anomalies regarding collection of fees and repayment in cash.
The DFS urged banks to undertake a thorough review of the last two-year period from January 1, 2022 to January 31, 2024 so as to ensure that all gold loans were disbursed in compliance with regulatory requirements and internal policies of banks.
It is to be noted that the price of the yellow metal has surged to a record level.
Price of 10 gm gold in the last one month has jumped from Rs 63,365 to Rs 67,605.
According to the letter, the department has come across instances of non-compliance regarding the gold loan portfolio and hence issued the advisory.
The country's biggest lender, State Bank of India (SBI) alone has a gold loan portfolio of Rs 30,881 crore as of December 2023.
Punjab National Bank's gold loan exposure stood at Rs 5,315 crore while Bank of Baroda was at Rs 3,682 crore at the end of third quarter.
As per the RBI norms, banks or gold loan finance firms can provide only 75 per cent of the value of the jewellery. However, relaxation was provided during the COVID-19 period to mitigate hardship.
The RBI had increased the permissible Loan to Value (LTV) for loans sanctioned by banks against pledges of gold ornaments and jewellery for non-agricultural purposes to 90 per cent from 75 per cent in August 2020.
This relaxation was available till March 31, 2021.
Last week, the RBI barred IIFL Finance Ltd from disbursing gold loans, with immediate effect following multiple supervisory concerns, including serious deviations in assaying and certifying the purity of the yellow metal.
RBI said the supervisory restrictions will be reviewed upon completion of a special audit to be instituted by it and after rectification by the company of the special audit findings and the findings of RBI inspection to the satisfaction of the central bank.