Opinion
All that glitters isn’t an auction of pawned gold—not even these days
Summary
- Gold auctions have risen in recent times. Is this a sign of distress? Only partly. These are more likely the result of lenders sprucing up their gold-loan portfolios after RBI frowned upon risky lending practices earlier this year.
On the face of it, the spate of gold auctions being witnessed in India is the result of greater distress among those at the lower end of the income scale. According to news reports, after rising sequentially in the second quarter of 2024-25, auctions of pledged gold are expected to rise further in the current quarter.
But in the absence of firm data on the underlying reasons, it is difficult to say with any certainty whether these auctions are being driven by the need for lenders to put their loan books in order and fall in line with the Reserve Bank of India’s (RBI) latest directives.
Or by distress among gold loan borrowers, who are typically among those in the lower half of the country’s pyramid.
Also read: Gold auctions on the rise as NBFCs look to clean up books on RBI diktat, rise in prices
Remember, the increase in gold auctions by lenders comes against the backdrop of robust economic growth, with India’s GDP having grown at an annual rate of over 8%, on average, over the past three fiscal years.
In such a scenario, even after factoring in a post-covid K-shaped recovery—which refers to an uneven distribution of the benefits of growth across income categories—the shakeout now being seen in the gold-loan portfolio of non-bank finance companies (NBFCs) and of regular banks (to a less extent) is more likely the fallout of a combination of higher non-performing loans due to lax lending practices and greater regulatory scrutiny by RBI.
Alarmed at the sharp rise in retail loans, and within these of loans advanced against gold, the central bank has been cautioning financial sector players against the danger of reckless lending in pursuit of profits, without doing proper due diligence.
Its latest directive in September 2024 followed an earlier attempt in May that sought to discipline gold lending by placing a ceiling on the amount that lenders could disburse in cash ( ₹20,000), with loans in excess of this limit required to be deposited in borrowers’ bank accounts. As India’s banking regulator, RBI’s concerns are not without reason.
According to its circular of 30 September to commercial banks, primary (urban) cooperative banks and NBFCs, its on-site examination of some of these entities found several instances of tardy lending practices.
These include deficiencies in the use of third parties for sourcing and appraising loans, valuation of gold without the presence of customers, inadequate due diligence, lack of end-use monitoring of gold loans, lack of transparency during auctions following loan defaults, weaknesses in the monitoring of loan-to-value ratios stipulated by RBI and the wrong application of risk weights.
Also read: Gold loans glitter on personal loan crackdown, soaring prices
Lulled by the run-up in gold prices over the past few months—almost 27% in the calendar year to date—lenders had perhaps thrown caution to the wind in the belief that the rising value of the collateral held by them (gold, i.e.) would protect them in the event of loans not being paid back.
As a consequence, they may not have been taking prompt action in cases of default, inviting RBI strictures in the process. The reality is that there is no such thing as a fail-proof loan. Appraisal and follow-up of loans must be collateral agnostic.
The mere fact that gold prices have risen sharply in the past year, as have stock markets, is no guarantee that retail loans against either gold or equity will not see defaults. After all, these are typically loans that fund consumption.
Collateral is only a fallback; and an expensive one at that when loans are not serviced. Lenders would do well to remember that.
Also read: Brisk growth in gold loans likely behind RBI warning
