The Reserve Bank of India’s (RBI) stern warning of action against lenders who follow irregular gold loan practises was prompted by the rapid rise in gold loan portfolio of a few south based banks, non-banking finance companies (NBFCs) and digital fintechs, according to people aware of the matter.

“Looking at the CSB Bank model, a few south-based banks grew their gold loan book sharply, either on their own books, through fintech partnerships or via their NBFC,” a source said.

Kochi headquartered Federal Bank’s gold loans grew to ₹29,722 crore in Q2 FY25 from ₹22,608 crore in Q2 FY24 and ₹27,431 crore last quarter.

Fedbank Financial Services or Fedfina is Federal Bank’s NBFC with overall assets under management (AUM) of ₹14,220 crore.

The NBFC too saw the share of overall gold loans rise to 39 per cent of overall AUM in Q2 FY25 from 35 per cent in FY24.

South Indian Bank’s gold loans, meanwhile, rose to ₹16,609 crore in Q2FY25 from ₹14,998 crore in Q2FY24. Both South Indian Bank and Federal Bank have partnerships with fintech for gold loans.

Furthermore, the regulator also saw a rapid rise in gold loan portfolio of NBFCs, including IIFL Finance—which was barred by the regulator from extending gold loans for irregular practises—andCapri Global Capital, whose share of gold loans in overall AUM (including on book and off-book AUM) rose to 34.2 per cent in Q2 FY25 from 16.4 per cent in Q2 FY24. Digital fintech Rupeek is also understood to have been pushing gold loan growth sharply. The RBI did not respond to businessline queries till press time.

“We would like to confirm that Capri Global Capital Ltd (CGCL) has not received any specific notice regarding its gold loan business from the RBI. We submit that CGCL conducts its business in line with the applicable regulatory norms. The company keeps reviewing all regulatory guidance from time to time and update their policies and SOPs to ensure compliance,” Capri Global Capital said in response to a businessline query.

Chasing growth

“I feel lenders are getting attracted to new gold loan business and everybody wants to do it, but it is a very process oriented business. There are a lot of operational challenges in gold loans and we have been able to iron out those through decades of experience,” said an official of a large NBFC.

“New players think that it is very easy to build a gold loan business, but when operational issues come up, they go for a toss. This is why the RBI acted, mainly for new players who are trying to grow loans rapidly,” they said.

A senior public sector bank official said the RBI had been reviewing gold loan portfolio over the last few months, resulting in regulatory actions against select NBFCs.

“It was under the radar of RBI for a long time. They are closely monitoring all portfolios. Whenever there is a spurt in particular portfolio, the RBI takes corrective measures, and there is nothing wrong with that,” they said, adding that a few NBFCs have recently grown their portfolio mainly in the gold loan segment itself.

What did the circular say

The RBI’s September 30 notification said that few lenders who partnered with fintechs or business correspondents (BC) for gold loans adopted irregular practises like carrying out valuation of gold in the absence of customer, doing credit appraisal and valuation by the BC itself, storing gold in the custody of BC and using internal accounts for disbursement as well as repayment of loans, among others.

According to a source, few entities were also observed rolling over gold loans using the same collateral deposited for the initial loan.

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