The Reserve Bank of India wants to ensure that lenders do not adopt any regulatory lapses in gold loans, a segment which has seen a huge spike over the last several months.

The RBI is planning to ask lenders to follow stricter underwriting processes for gold loans and monitor the end-use of funds, news agency Reuters reported.

The central bank also wants banks to step up background checks on borrowers and ascertain the ownership of the gold that is being mortgaged as it seeks to cool down lending in this fast-growing segment. 

"The RBI wants to ensure that the entities are following a standard protocol and any growth in the gold loan sector is not out of bounds. It wants to make sure that any unethical business practices are curbed and financial stability is protected," Reuters quoted one of the sources who is aware of the central bank's thinking as saying.

Since September 2024, banks' gold loans have been rising by 50%, sharply outpacing the growth in overall loans, bolstered in part by tighter norms for unsecured lending.

In India, the world's second-biggest consumer of the precious metal, households typically buy gold during festivals and weddings. Record prices make gold loans more attractive, Reuters reported. 

In September, the RBI said it found several irregular practices in the gold loan industry and asked lenders to comprehensively review their lending processes to identify and address regulatory lapses.

The RBI has identified shortcomings in the sourcing of loans as well as the appraisal and gold valuation and "not all entities are following the standardised rules", Reuters quoted a source aware of the central bank's thinking as saying. 

In audits conducted over the last 12-to-16 months, the RBI found irregularities in the portfolios of non-bank lenders and weaknesses in monitoring the amount of funds that can be lent against gold, Reuters further reported quoting two sources. 

The central bank also found that fintech agents of banks were collecting gold, storing and weighing it, tasks that lenders are meant to handle.

Lenders were also auctioning gold without informing borrowers who had defaulted, a source told Reuters. 

The regulator aims to treat all lenders uniformly to ensure no entity bypasses regulations, including for gold auctions and monitoring use of the loaned money through receipts.