Gold loan interest rates are the lowest compared to most other secured loans. The reason is that borrowers keep gold as collateral, which in itself is a very priced asset. Gold loan companies lend money like any other, which implies that its rules are not much different from other secured loans. However, the absence of clear-cut regulations regarding repayment in the event of the sudden death of the borrower made the borrowing process cumbersome and fraught with litigations.
In a recent string of regulations being brought forth to strengthen India’s financial landscape, the Reserve Bank of India (RBI) is mulling over the possibility of introducing guidelines for gold loan companies regarding various aspects. These may include procedures for resolving outstanding debt in the event of the borrower’s death, ensuring that terms and conditions are communicated in local languages, establishing a process for refunding excess funds from gold auctions, and other related matters.
Guidelines on loan recovery
The expert panel appointed by the RBI under the chairmanship of former deputy governor BP Kanungo in May 2022 put forward a proposal on loans and advances by gold loan companies in the early week of June this year. Gold loan companies have been asked to respond to the recommendations and help with further suggestions by July 07 this year.
The proposed bill highlights how the outstanding loan must be treated or repaid in case of the sudden death of the borrower. To ensure compliance, the guidelines suggest that gold loan companies should issue a notice to the nominee or legal heir for the settlement of any unpaid debts and maintain a record of it before proceeding with the auction of the pledged gold. Failure to follow the proper notification procedure prior to the auction could result in the deployment of accountability measures. Gold loan firms may be required to register nominees at the time of loan extension as a convenience measure.
Sumit Sharma, Founder, Radian Finserv said, “The suggestive guidelines promote a higher degree of governance standards for the gold loan companies in the quest for growth. Registration of a nominee is a welcoming step since the ornaments pledged are more valuable to borrowers than the stated value of the gold. The degree of sentimental attachment shall continue to remain high in this asset class and hence the step is in the right direction.”
The recommendations, though late, would pave the way for legal regulations that gold loan companies must abide by. Many companies resorting to illegitimate measures to recover the loan amounts or usurping the gold kept as collateral for the loan have mandated the need for a set of guidelines to regulate the working of the gold loan industry just like any other financial institution doling out secured loans.
The implementation of registering a nominee or legal heir would be a positive and welcomed step. It would provide clarity and ensure a smoother process for settling outstanding debts and addressing matters related to the pledged gold. By registering a nominee or legal heir, individuals can have greater peace of mind, knowing that their interests and those of their beneficiaries are protected in the event of any unforeseen circumstances.
The recommendations would ensure a win-win situation for both the borrowers and the lending institution. Neither would the borrowers lose their valuable assets while allowing lenders to recover the amount lent in lieu of the gold (bullion, jewelry, or bonds) kept.
Anuj Arora, Co-founder & COO, SahiBandhu added, “For nominees and families facing financial challenges after losing a loved one, this proposed initiative will be beneficial and provide them with some financial and emotional security. This would be a commendable step towards establishing uniformity throughout the industry, ensuring a consistent policy that safeguards the interests of customers and the one that instils trust and confidence in all involved stakeholders.”
Guidelines regarding gold auctioning
Additionally, the committee emphasizes the importance of including a notice period as a mandatory requirement in the fair practices code and loan agreement of gold loan companies. This ensures that borrowers are informed in advance about the circumstances that may lead to the auction of their gold. By incorporating a notice period, borrowers have an opportunity to address the outstanding debt or take necessary actions before the auction process begins. This adds transparency and fairness to the practices of gold loan companies and protects the interests of borrowers.
Given that a significant number of gold loan accounts are held by middle and low-income households as well as rural populations, the committee recommends that lenders should communicate the terms and conditions to borrowers in local and regional languages. This ensures that borrowers fully understand the terms of their loans and can make informed decisions.
Furthermore, in cases where oral communication occurs, the committee suggests that it should be recorded and preserved for reference and clarity. By implementing these measures, lenders can enhance transparency and facilitate better communication with borrowers from diverse linguistic backgrounds, promoting fair and inclusive lending practices.
Refund of surplus from gold auctioning
The loan company cannot just keep or auction the gold at its will. The RBI recommends timelines during which the gold must be auctioned and the surplus amount refunded.
The committee proposes that the loan agreement should include a specific time limit, typically not exceeding one month, within which any surplus amount resulting from the auction of gold should be refunded to the customers. In case the refund is not made within the specified time frame, the company should be obligated to pay interest as stipulated by the RBI.
Furthermore, the surplus amount obtained from the auction of gold must be credited directly to the borrower's account. These measures ensure timely and fair reimbursement of any excess funds to the customers, promoting transparency and accountability in the gold loan process.
Applying for gold loans is getting increasingly common. Considering how these rates have not gone up much even when the country’s Central Bank had hiked its repo rates and Indians’ allegiance towards buying gold during important occasions, suggesting and implanting guidelines to regulate gold loans had become imperative. The putting forth of suggestions by the RBI’s expert panel is the first step in this direction.