RBI committee proposes guidelines on gold loan recovery in case of borrower’s death

The gold loan companies may be required to register nominees while extending loans.

The Reserve Bank of India (RBI) may soon issue guidelines for gold loan companies on settling the outstanding debt in case of death of the borrower, communicating terms and conditions in local languages, process to refund surplus from the auction of gold and more.

“We work with multiple lenders and adhere to the diverse policies they have in place. The recent report from the BP Kanungo committee on customer service standards is a commendable step toward establishing uniformity and clarity across the industry, ensuring a consistent policy that safeguards the interests of customers and the one that instils trust and confidence for all stakeholders involved," says a spokesperson from Rupeek, gold finance company.

On June 5, former deputy governor BP Kanungo proposed a list of recommendations to improve customer service standards in regulated entities. The RBI had set up a six-member committee in May 2022, headed by Kanungo to examine and review customer services in regulated entities with an aim to protect the interests of customers.

One proposal in the report was on loans and advances for gold loan companies. The RBI has invited comments from stakeholders by July 7.

In case of the demise of the borrower

The committee recommends that, in case of the death of the borrower, a notice may be served to the nominee or legal heir to settle the outstanding and keep the same on record before auctioning the pledged gold. Accountability may be fixed for non-adherence to the due notification process prior to the auction of gold. For facilitating this, the gold loan companies may be required to register nominees while extending loans.

“While I understand the need for loan recovery procedures, I believe that there should be measures in place to protect borrowers from losing their valuable assets. Registering a nominee or legal heir would be a welcome move,” says Sharad Ingule, Ex - Founder & CEO, GoldUno.

Also read | Gold loans: Banks and NBFCs that offer the lowest interest rates

Auction of gold

Further, the committee highlights circumstances leading to the auction of gold, and the requirement of a notice period should mandatorily be a part of gold loan companies’ fair practices code and the loan agreement.

“Alternate contact number should be registered and the mediums like telephony, messengers and emails should be adopted to issue an auction notice to the borrower and nominee,” says Ingule. Regulated entities (REs) shall record the acknowledgement receipt of the notice before scheduling an auction of gold.

“REs should consider modifying repayment terms, or providing temporary relief measures to alleviate the burden on borrower’s nominee and facilitate loan repayment if the outstanding amount does not exceed the permissible loan-to-value limit,” says Ingule.

Terms and conditions in local languages

A large volume of gold loan accounts belong to middle and low-income households and rural population. Hence, the committee recommends that the lender should communicate the terms and conditions to the borrowers in local and regional languages. Recording of oral communication, if any, must be preserved.

Also read | Gold or fixed income: which is better to help diversify your portfolio?

Surplus to be refunded from auction of gold

The committee suggests that the loan agreement should incorporate the time limit (maximum one month) within which the surplus, if any, from the auction of gold would be refunded to the customers, failing which the company should be required to pay interest, as may be stipulated by the RBI. Surplus from the auction of gold must be credited to the account of the borrower.