Daybreak - Want a gold loan? Lenders will break every rule in the book to get you one

Episode Date: August 27, 2024

Lenders are flouting every rule in their books to cater to the rising gold-loan demand. Thanks to the collusion between lenders and borrowers at some of the branches, one in ten gold loans every month is sanctioned through malpractices—like tweaking weight and misreporting purity of gold, said two industry executives.In this episode, we delve into the murky world of gold loans and what often goes wrong when borrowers seek them out. Tune in. Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.Want to be part of the Daybreak community? Introduce yourself here.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. I'm Snigda, the co-host of Daybreak. And I want to take you behind the scenes of a typical day here at the Ken studio in Bangalore. We spend most of our time, of course, working on episodes like the one that you're listening to right now. But when we're not talking about,

the next startup that is preparing to go public or the collapse of ed tech companies in India or why quick commerce is blowing up we spend a lot of time talking about books, movies, shows, music, great restaurants in the city and a whole bunch of other stuff. Rahal and I are constantly asking each other for recommendations, things that very often don't end up making it to the podcast. And then it occurred to us. Why have haven't we roped you in? We are fixing that right away by launching a new weekly segment, Daybreak Unwind, which will go live as soon as we have enough responses from you folks.

We want to hear from you, our listeners. Do you have a great recommendation for us? Something that you think we just have to read or watch or listen to? If you do, click on the link in the show notes of this episode and let us know. Last week, Finance Minister Nirmala Sita Raman held a meeting with some senior officials from her ministry at Vigyanbhaven in Delhi. It was meant to be a regular, closed-door review meeting, nothing out of the ordinary. That was until about 1pm, just as the group was about to break for lunch. An official decided to address the elephant in the room.

His name is Vivek Joshi and he's the secretary to the Department of Financial Services. He decided to casually bring up the topic of gold loans. He asked what banks were doing to curb malpractices. Now, all of this was recounted to the Ken reporter Rana Kumar Gunjan by two people who were actually at the meeting. They said that there was a fair bit of tension in the room after Vivek Joshi decided to bring up gold loans. Now, this, despite the fact that there were some real bigwigs in the room,

bankers, managing directors of public sector banks, and of course, finance ministry officials themselves. But funnily enough, not one person had a satisfactory response to Vivek's question. They said things like carrying out regular audits, surprise checks, pretty generic stuff. But one thing that everyone in that room agreed on and acknowledged was that the gold loan situation in India was very quickly getting out of hand. One of the attendees of the meeting who spoke to Roanak called it a menace that needed immediate attention. And he isn't wrong. You see, for a long time, gold loans were not on top of everyone's priority list when they were looking to borrow some money.

But in the last few years, that's really changed. That's mainly because gold prices have been hitting new records time and time again over the last year. And with that, the demand for gold loans has been soaring. People in the space say they have never seen anything like this before. So gold loan companies are of course making the most of it. In the process, unfortunately, malpractices and violations of rules are also becoming the new normal. Basically, Vivek Joshi's question wasn't out of the blue. This is something that's been on everyone's mind ever since the RBI banned IIFL finance from sanctioning new gold loans

after it found some discrepancies in its gold loan books. This was a really high-profile incident. But the fact of the matter is, it happens everywhere. even in private banks and other non-banking gold loan companies. So the finance ministry and other government agencies like the Department of Financial Services have been actively clamping down on the business of gold loans. In this episode, we delve into the murky world of gold loans and what often goes wrong when borrowers seek them out.

Welcome to Daybreak, a business podcast from the Ken. I'm your host Rahel Philippos, and I'll be joining my colleagues Nikta Sharma every day of the week to bring you one business story that is worth understanding and worth your time. Today is Tuesday, 27th of August. Meet Rakesh. He's a 39-year-old engineer who resides in Noida, Uttar Pradesh. Last month, the Ken reporter Rornak spent some time with him and his wife, who didn't want to be named in the story.

When Ronek met them, they were on their way to a local branch of a well-known non-bank. They needed some quick, liquid cash, so they decided to take a gold loan. Rakesh's reasons were pretty straightforward. It's why most people opt for gold loans. Lower interest rates. In fact, they are about 2 to 4 percentage points lower than with an unsecured personal loan. So Rakesh thought it was the best bet for the two of them. On their way to the non-bank, Ronek noticed that they were both pretty nervous.

And understandably so, they were carrying over 35 grams of gold ornaments with them in their car. They believed that the gold was worth over 2 lakh rupees. and they thought they would be receiving an advance of up to 75% of it. That's the amount that they needed. But unfortunately, the couple was in for quite a surprise. When they finally made it to the branch, they were told that the gold was only worth $1.8 lakh rupees. A representative told them that the ornaments they bought

were a mix of both 18 and 22-carad gold, so that reduced the overall value. What that meant was Rakesh would not be able to get the loan amount he needed. The non-bank offered about 80% of that amount. So obviously, he was pretty disappointed. The couple decided to take their business elsewhere. Just as they were about to leave, the appraiser told them that they would not be able to find a higher loan value.

And surely enough, 30 minutes later, the couple returned. The appraiser was right. They visited other gold loan companies and no one was able to match the loan value. In fact, Manapuram, another leading non-bank's specializing in gold loans, valued their gold even lower at 1.6 lakh rupees. Now, this raises a pretty fundamental question, right? How are these loan companies actually determining the value of the gold? And the truth is, there's no standard approach here.

So while most people use nitric acid and salt solution tests, Manapuram uses a device called a carrot meter to check the purity of gold. This is also where the first problem arises, because some entities manipulate the loan value by misreporting the gold's weight or purity. Now, back to Rakesh and his wife. They were obviously unhappy with Manapuram's offer, so they went back to the first non-bank. And the appraiser there had some interesting advice for them. He told Rakesh to come back towards the end of the month.

Two other first-time gold loan borrowers that Roanak spoke to face exactly the same drill at Bajajaj finance and another branch of Manapar. They were all told to come back at the end of the month. That's because month ends are when a lot of shady business happen. This is when employees strive to meet their sales targets, so they end up passing a few risky loans. And that's not all. Beyond this, another fresh tactic has emerged in the market

after the RBI's crackdown on IIFL, asking a new borrower to bring a repeat customer along as an unofficial guarantor. Basically, the bank wants someone to act as a safety net if things were to go awry. But these are just verbal agreements. In reality, if the new borrower defaults, the guarantor can back out, which means that the lender has to bear the brunt. The fact of the matter is, things are still better in Tier 1 cities. Tier 2 cities, on the other hand, are a whole other ballgame.

Stay tuned to find out. The day after he met Rakesh and his wife, Ronek made his way to Bullock. a small city located quite close to the national capital. At a branch of Punjab National Bank there, he met a 42-year-old farm labourer who walked in at half noon with 15 grams of his wife's gold jewelry. Like Rakesh, he also wanted a gold loan. He needed at least $75,000 to repair his home after it was battered in the recent monsoon and he also had some debts to repay.

But unfortunately for him, the appraiser valued his gold only at $80,000. He found impurities and traces of silver in it, which would mean his maximum loan amount would only be $60,000, 20% less than what he needed. He was obviously disappointed by the news, but as luck would have it, he ran into a bank executive at a nearby tea stall. The executive had some advice for him.

He told him to prove he had agricultural land to his name. Slide here and there later, the labourer would be able to get his $75,000. rupees. Now, slight here and there seems to be a running theme in a lot of the gold loans being sanctioned these days, particularly in tier two cities. The reason the executive made that suggestion in the first place was because the RBI mandates a 75% loan to value or LTV on all retail gold loans. But gold loans taken for agricultural purposes come under priority section lending. So a lot of banks are eager to sanction such loans just so that they are able to.

to meet PSL norms. In such cases, the loan to value varies from bank to bank. Now, unfortunately for this particular borrower, the farm labourer, he had no land of his own. But where there is a will, there is a way. The farm labourer found a workaround that a lot of people have been opting for in tier two cities. He found an acquaintance of his who owned land and had recently financed a tractor through the same executive. So they made a deal. the acquaintance would use his land documents and the farm labourer's goal to secure the loan.

Then the farm labourer would use the funds to pay the EMI to the bank and some commission to the acquaintance. And finally, the bank executive also got to tick another box on his sales target. This is just one of the many ways people have figured out how to game the system, both at banks and at non-banks alike. For instance, the RBI caps cash disbursements for gold loans at about $20,000. But borrowers often submit letters claiming they have no bank account and non-banks provide cash instead. Customers prefer this immediate cash over bank transfers because typically the latter can take two to three hours or until the next day if they arrive late. Lenders, of course, don't mind giving out cash because it helps them cater to the growing demand.

Now, the problem here is the complete lack of accountability and the lack of fear. Lenders don't mind risking their books to give out gold loans. But why are they willing to risk it all? More on that in the next segment. Okay, so by now we know that gold loans can be a risky business, especially when rules are bent. So why are banks and non-banks going all out with gold loans? On one hand, the stakes are really high.

So if the borrower defaults, the lender will have to auction the gold, often at a lower price than its true value. This will not just have financial implications, but could also lead to the RB. are taking strict action. But at the same time, gold loans are the safest bets from a lender's perspective. That's because unlike with home loans or with car loans, where the asset remains with the borrower and recovery involves a lengthy process,

gold loans have the asset with the lender. So if the borrower defaults on a gold loan, the lender can auction the gold right away. Borrowers end up being really afraid of losing their property if they don't pay off in time. Not to mention the emotional attachment that, Indians have to their gold. So a mix of confidence and opportunism is pushing lenders to take on more risk. No wonder people like DFS secretary Joshi and other bigwigs in the finance ministry are worrying. Right at the beginning of the episode, I told you about that meeting in Delhi

where Joshi asked about gold loans. At the same meeting, he was heard telling people that the way to deal with these risks is via standardization. That includes the way in which gold is a He said assessing of gold needs to be standardized beyond just the carrot meter. Beyond that, the ministry and agencies like DFS will continue clamping down on companies that seem to be bending the rules, just like IIFL. That clearly doesn't seem to be bothering anyone else though. Because for a lot of these banks and for these gold lending companies, short-term business gains are trumping long-term financial health. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings.

A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. Today's episode was hosted by Rahil Filippo's produced by me, Snigda Sharma, and edited by Rajiv Sien.