Banks are exploring whether a centralised repository for reporting frauds in gold loans should be set up to tackle rising incidents of frauds amidst robust demand for these loans since the outbreak of Covid-19 pandemic.

The repository could help prevent/minimise gold loan frauds as lenders will be able to cross-check prospective borrowers’ record on the quality of gold they pledged for their earlier borrowings, said a senior public sector bank official.

Rise in gold loans

Loans against gold jewellery (LAGJ) portfolio of scheduled commercial banks (SCBs) soared by about 66 per cent year-on-yar (yoy) to ₹62,926 crore as at August 27, 2021, against ₹37,860 crore as at August 28, 2020, according to RBI data. SCBs LAGJ portfolio stood at ₹26,542 crore as at August 30, 2019.

Both internal and external frauds in gold loan business are the biggest risks, per an ICICI Securities report on gold loan.

“Banks are witnessing cases of these frauds in their gold loan portfolio in recent times.

“While specialised gold loan non-banking financial companies (NBFCs) are also seeing fraud cases in recent times, they are better placed in protecting themselves against such frauds,” said ICICI Securities Research Analysts’ Ansuman Deb, Kunal Shah and Vishal Singh.

The Analysts’ observed that internal fraud takes place when the company or bank’s own employees indulge in committing fraud. External fraud is a situation when a customer commits fraud by pledging fake collateral etc.

Banking expert V Viswanathan underscored that gold loan fraud can take place due to pledge of fake ornaments; and gold appraisers/valuers (either singly or in collusion with branch staff) getting their accomplices to take gold loans. Then there are cases of stolen ornaments being pledged.

“Aggressive expansion targets in gold loans puts pressure on branch officials. This leads to reliance on middle men to bring in borrowers or high dependence on appraisers or local staff. Accomplices are brought in by appraisers,” he said.

Further, if the appraiser/valuer knows that staff in a particular branch is not skilled in dealing with gold loans, word gets around fast locally, resulting in frauds.

Viswanathan noted that top performing branches get preferential treatment at head office or controlling office, resulting in fewer inspections. So, local staff are tempted to commit fraud.

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