Banks have instructed their branches to ensure that gold loans availed of by customers are repaid and closed, and not renewed or upgraded.
Offering loans against gold has become popular in the recent years due to ease of process, lesser documentation, rapid availability of funding, and a variety of repayment options. Borrowers can pledge their gold as collateral and borrow the principal amount based on the gold’s purity, weight, and market rate. For non-agriculture gold loans, the Loan to Value is 75%.
The interest rates and tenure vary with respect to banks and there are various repayment options, including paying the interest and principal in equated monthly instalment (EMI), paying the interest as EMI and the principal at the end of the tenure and a bullet payment option where the principal and interest are paid at the end of loan tenure.
“There has been practice of evergreening – where fresh loans are given to borrowers to prevent an existing loan from turning bad. If the price of gold increases, borrowers who have not paid the interest on the gold loan properly, approach the bank, seek upgrading of the gold loan, and open a new loan account,” R.S. Dhuriyan, advocate, Indian Bank, said.
For instance, if the jewellery was valued at ₹1 lakh when the loan was availed, and the price increases to ₹1.50 lakh, the customer can seek to upgrade the loan for additional ₹50 lakh in a new loan account, he pointed out.
The RBI rules, however, do not allow evergreening, he added. Post Audit inspections of banks, RBI has told them to follow the rules, he said.
“I have a gold loan at a public sector bank in Pattabiram and went to make my interest repayment, the official at the bank said I cannot renew my gold loan after its tenure is over... A lot of customers have been paying interest and seeking renewal of the gold loan,” said Subha (name changed).Bank officials confirmed that branches were orally instructed not to renew existing gold loans.
Consumer activist T. Sadagopan said it was understandable that the regulator wanted to ensure that the existing gold loans were repaid, but banks should have been transparent in telling the customers that they should have repaid the gold loans.
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