The finance ministry has written to public sector banks this week seeking a review of their gold loan books, two people aware of the matter told NDTV Profit on condition of anonymity.

In a letter to banks, the Department of Financial Services has sought a complete analysis of the existing gold loan book, the quality of the gold held as collateral and any attempts at window dressing at the branch level.

Two large public sector banks were found to have serious deficiencies in processes, the people quoted above said without divulging the names of the banks. In certain cases, 18 carat gold jewellery was recorded as 22 carat in an attempt to hike the of the gold and disburse higher loans.

The Reserve Bank of India allows lenders to extend loans up to 75% of the of gold.

According to the one of the two people quoted above, bank branches were found to also be disbursing gold loans closer to the end of a given month, without actually having any collateral against them. This was being done to boost the size of the portfolio and achieve monthly business targets. The following month, the branch would reverse the loan amount.

The action by the finance department is likely in preparation of a crackdown on questionable practices in retail loans across the financial services system, the second person said.

Last week, RBI asked IIFL Finance to stop sanctioning and disbursing fresh gold loans, owing to material supervisory. It also barred the non-bank lender from selling or securitising its gold loan book.

During the Covid-19 pandemic, RBI had eased the loan-to- ratio for gold loans to 90% from 75% in the case of banks. This led to a rapid build-up of gold loan books across lenders in India. The loan-to- ratio was later reversed, as India came out of the pandemic.

However, with issues cropping up across the lending ecosystem, the regulator may review its norms and make them tougher, the people quoted above said.