Coming soon: A shield for you to not lose pledged gold

New Delhi: Banks are looking to put in place standardised rules so that heirs of those who have taken gold loans can repay the debt and reclaim family jewellery in the event of the borrower’s death. A key element of the plan involves asking borrowers to provide a letter authorising who can do so in the event of their death, said people with knowledge of the matter.

Current practices vary in such situations and often give rise to various legal challenges, which meant the lender would auction off the pledged gold, they said.

gold loan

Legal Issues

Putting rules in place would allow families to legally assume loan service obligations to secure the underlying gold, given the sentimental value typically attached to ornaments belonging to close relatives.

“Earlier this month, in a meeting, this issue was discussed, and there was a consensus that authorisation letters can be sought from borrowers,” said one of the executives. “Banks will also explore a standardised format to avoid legal hassles.”

Some state-run banks have already started to offer this option but there are operational issues due to lack of a legal framework.

The loan against gold segment is one of the fastest-growing categories for lenders. As of January 26, 2024, outstanding loans against gold jewellery were up 17.4% from a year earlier to Rs 1.02 lakh crore.

Last year, a committee headed by former Reserve Bank of India (RBI) deputy governor BP Kanungo suggested that in case a borrower dies, a notice should be sent to the nominee or legal heir to check if they want to settle the outstanding amount. Their response should be on record in case the pledged gold is auctioned, the Review of Customer Service Standards in RBI Regulated Entities panel had suggested.

Leading gold financing firm Muthoot Finance told ET that, on the basis of the Kanungo committee recommendation, the company is in the process of initiating a nomination procedure for its customers. Manappuram Finance did not respond to ET’s queries.

The second bank executive said that a number of legal issues have arisen in cases where the borrower died. At times, family members who weren’t legal heirs wanted to repay the loan and reclaim the jewellery.

“In most such cases, banks used to auction the gold loan pledged to recover their amount. This new facility of an authorisation letter will resolve such issues,” he added. “There is a sentimental value attached to gold jewellery, and we hope that borrowers will use this facility, giving (their families) a chance to reclaim their assets.”

In February, the finance ministry wrote to all public sector banks, asking them to review gold loan processes amid fears about risky debt, given the rally in the price of the metal.

Gold prices reached an all-time high earlier this week, surpassing the $2,200 mark, as the market expects the US Federal Reserve to begin its rate-cutting cycle in June.

As per RBI norms, banks or gold loan finance firms can provide only 75% of the value of the jewellery. A recent report by rating agency Crisil noted that banks have sharpened their focus on non-agricultural gold loans for personal use, particularly in the Rs 3 lakh and above bracket, over the past three years.

“The market share of gold-loan NBFCs (non-banking finance companies) has been resilient at over 60% between March 2021 to September 2023, despite strong competition from banks,” it had said, adding that banks have focused on borrowers seeking bigger loans and competitive interest rates.

Roy Walsh

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