Gold Loans & Frauds
- By CA &CMA Ranganatha Krishna Achar
When I was doing my CA Articleship in a small town of Udupi in Karnataka to be precise we used to have lots of Bank Audits because Udupi and neighboring district of Mangalore were responsible for the existence of 5 big banks of India which later got merged by the Government of India order, previously we had Canara Bank, Syndicate Bank, Vijaya Bank, Corporation Bank, And Karnataka Bank from the private sector, so it was evident that Banking was flourishing in this part of Karnataka with Branches of the Bank Spread across every Half a kilometer and not to mention the existence of Numerous Co-operative Banks. So most of the time we were in to Bank audits of different Banks / Branches and those days the easiest form of Clean loan was Gold loan and here during the course of my Articleship we found out that how the well oiled principles of gold loans and valuation was diluted by the concerned Responsible people making a dent in the profits of the Banks.
Frauds in gold loans can be due to various reasons as mentioned below
1 ) Pledging of fake gold
2 ) Pledging stolen gold without clear title
3 ) Pledging Low quality Gold < 18 K Gold
According to a study made by one of the Major gold loan NBFC of India , the quantum of fraud which used to be 1 in 30,000 customers earlier has come to 1 in 10,000 customers which means there is an sharp increase in frauds with respect to gold loans.
There are 3 parties in each gold loan transaction
1) The Banker
2) The Official Registered valuer appointed By The Bank
3) The Customer
Now there can be a scenario where all the 3 concerned people are in perfect understanding and swindle the Bank if there are no proper checks and controls or absence of Internal Audit & Internal Checks.
The probability is higher because the branches are spread in far flung remote areas where there is no proper supervision on a periodic basis.
The probability of the Registered valuer teaming up with customer to commit a gold loan fraud is too high and herein lies the counter check, sometimes the Banks have to get the gold valued by another Registered valuer without the knowledge of the Registered valuer so that there is an surprise element in the valuation of gold,
According to a study made by KPMG, the ratio of Assets under management (AUM) of Gold loan should rise to a staggering Rs 4617 Billion by the end of the Year 2022 with share of
Organised and unorganized sector in the ratio of 1:3, if we follow the breakup of loan disbursers, it can be broadly classified in to
1 ) NBFC Share of 18-24 %
2) Banks share of 12-15%
3) Local money lenders Share of 25-50% .
How Frauds take place in gold loans
Case 1 ) Fake gold is certified by the Registered valuer as genuine and is kept in the Bank and only after some time the banks realises that the gold served as a security is fake and initiates the legal proceedings to recover the proceeds of the gold loan disbursed earlier.
Case 2 )
Sometimes the entire proceeds of the gold loans are swindled by the Banks officials itself and this comes in to light when there is a routine transfer of officials and the problem arises during handing over of the charge, there would be a big charge under gold loan disbursement but the fact would be that there is no physical gold in security and the Bank has no other remedy but to hand over the case to the Police of that jurisdiction by lodging a written complaint and filing of FIR.
Case 3 ) The registered valuer gains the trust of the bank officials and routinely passes the valuation of fake gold as genuine gold and he himself will arrange customers for gold loan without coming in to picture directly for a small commission to his partners in crime in exchange of Pan Card / AADHAR Card Details to create the fake customer ID, in such cases the loan disbursal will be a higher amount and prima facie the valuer will be the bigger partner in crime and in India this is a common practice where an silver item is gold plated with 2-3 layers of gold and passes as gold for the sake of loan
Why gold loans are favoured in India ?
No need of CIBIL Score to get loans against gold and the LTV ( Loan-To-Value Ratio) stands at an high 75 %, but this becomes a problem when the Gold rates are going up in the present economic scenario because of COVID-19 problems and gold is perceived as an instrument of Safe Haven, which is rightly so because the margin ratio also raises sharply and the banks have to call for extra margin from the customer which he may fail to give because of poor economic conditions worldwide.
Farmers up to an extent can take Gold loans under lesser rate than commercial loan under the priority sector lending as notified by RBI with some instances of interest subvention for prompt customers up to 3 %. So good farmers can benefit from this scheme even if it is gold loans.
Gold loans Will continue to survive in India because of their liquidity issues and its ready acceptance as a security in any part of India both in organized and unorganized sector but as I said earlier to reduce the frauds in gold loans approvals and sanctions, its always better to have an additional Registered Valuer and should encourage the Bank staff to be transferred once in 2 years and most of the gold loans frauds came to light with the change of staff due to rotation or transfers.