How real-life Lucky Baskhars are causing a spike in gold loan defaults

Last week, cops arrested the assistant manager of Bank of Baroda’s Mannadimangalam branch in Tamil Nadu’s Madurai district for allegedly stealing gold jewellery weighing more than 560gm. Ganesh, the arrested staffer, was held responsible by the bank after an audit ordered by the regional manager found that nine packets of jewellery pledged by borrowers were missing.What 34-year-old Madhu Jayakumar, who hailed from neighbouring Trichy, managed to pull off would make Ganesh look like a small fry. Jayakumar, who was the manager of Bank of Maharashtra’s Vadakara branch in Kerala for three years, was transferred to Kochi in July 2024. When his replacement Irshad took stock before taking charge, he and the bank higher-ups were in for a shock. As much as 26kg of gold jewels worth more than ₹17 crore were found to be fake.Stories like these are not few and far between. A casual trawl on the internet throws up numerous such cases across various banks. State Bank of India, Bank of India, Canara Bank and ICICI Bank are among the recent victims. In almost all such cases, the police narrative goes along the lines of a rogue branch staffer, jewel assessor or junior employee using the gold or money for some personal purpose such as online gambling or stock trading.These tales are reminiscent of the story of the movie Lucky Baskhar. Set in the 1990s, the multilingual hit has Malayalam superstar Dulquer Salman playing the eponymous character, who swindles overnight funds and rotates it for personal benefits and manages to turn the tables on the bank bosses who try to fix him, eventually walking away with a booty of ₹100 crore. However, over and above the hand played by these frontline staff, there seem to be larger systemic issues at play, including the methods used by banks to grow their gold loan business.Though Jayakumar was not as lucky as his reel counterpart, he indeed alluded to the role of his superior officials in a video message released days before his arrest. This angle seems to have not been substantiated or followed up in the police investigation, but the details have been disturbing enough to be raised in internal correspondence within the banks and regulatory corridors.Rush for goldAs gold prices have been on an ascent, there has been a rush for new business among banks, especially public sector lenders, in the past couple of years. At the end of 2024, banks’ total gold loan portfolio had swelled to ₹1.7 lakh crore, taking their share of the category to more than 80%. In the nine months ended December 2024, this segment saw a 72% growth against a 7.6% rise in the broader personal loan segment. medium118623959While factors like a recent run-up in gold prices and reporting recategorisation of agricultural loans into this category have contributed, a significant portion of this scorching growth has come at the cost of prudent business practices and by throwing guidelines and safeguards to the wind. The Bank of Maharashtra episode is only the latest symptom of a larger malaise ailing the system.Bank of Maharashtra’s gold loan book was around ₹140 crore at the end of FY23. Within two years, it has grown 15x to more than ₹2,200 crore.Keeping in line with the larger market, where about 79% of the gold loan business comes from the southern part of the country, the bulk of Bank of Maharashtra’s business has come from Kerala, where the lender has expanded aggressively, opening more than 40 branches in the past four years.Under the regulatory lens is the bank’s Ernakulam zone, under which the Vadakara branch falls. “Ever since the Ernakulam zone was formed, the prime focus of the zonal management has been to increase business by any means,” said an insider familiar with the issue.The methods included aggressive marketing of gold loans (even by flouting the rules) or sanctioning big-ticket loans to entities already in the gold loan business. Direct selling agents (DSAs) were onboarded rapidly. And the bank relied on them heavily for quick business growth, according to documents reviewed by ET Prime.The Ernakulam zone grew the gold loan business in such a way that even private players were left behind. Branches in the zone focused mainly on taking over gold loans from other banks, NBFCs (non-banking finance companies) and private financial enterprises.DSAs were offered commissions on bringing big-ticket gold loans. Gold appraisers were also used for canvassing more gold loan business. Some newly opened branches went on to cross the ₹50 crore business mark very quickly by focusing only on gold loans. It was in such a business environment that Chatham Kandathil Financiers approached the bank for repledging the gold ornaments that the company had taken from the general public as security against loans.“The zonal management, knowing that it is completely illegal, not only agreed for repledging but also encouraged them to pledge more gold to boost the business. This led to a series of severe procedural violations including that of KYC (know your customer) guidelines,” said a person familiar with the developments.The villain of VadakaraJayakumar’s video message talked about the involvement of zonal-level officers in encouraging some shady practices in the rush to grow the gold loan portfolio. He had referred to Chatham Kandathil Financiers, who had brought this bulk business.People familiar with the story say the Vadakara branch, where the fraud happened, was only one among those branches where Chatham Kandathil Financiers used to repledge gold on a regular basis. Other branches include Sulthan Bathery, Thamarassery, Manjeri, Malappuram and Kozhikode.The Vadakara branch, which opened in 2021, was focusing only on gold loans. It crossed the ₹50 crore mark so quickly that the branch manager was often praised in the review meetings and touted as a role model to other branch heads.The head of the Vadakara branch was aware that the gold ornaments being pledged by Chatham Kandathil Financiers were the ones abandoned by the general public on being unable to pay the exorbitant interest charged by the pawnbroker.Since the gold loan could not be opened in the name of a non-personal entity, the gold was pledged in the name of the staff of Chatham Kandathil Financiers.Often a single person, most likely the in-charge of a particular branch of this private financier, would come to the bank branch for pledging the gold. He would bring with him the KYC documents of multiple persons, mainly the staff of the pawnbroking firm, and sign all documents on behalf of those persons.In some branches, there have been instances of opening more than half a dozen accounts on a single day in such a manner. The zonal management allegedly forced the branches to ignore the procedural irregularities and provide “good service” to this pawnbroking firm. This became a routine affair of at least 5-6 branches. mediumhttp://youtu.be/zHqxc7HSdSo?si=Zp6QKHct05T649P4Who is Chatham Kandathil?A search for Chatham Kandathil throws up two companies in the MCA (ministry of corporate affairs) records — Chatham Kandathil Nidhi and Chatham Kandathil Forex Services. The companies have their registered offices in Kozhikode. Vadakara is about 48km to the north.Chatham Kandathil Nidhi has three directors who share the house name of Chatham Kandathil — Joseph Tennyson, Jaison Joseph and Joseph Paulson.While the family has reportedly been in the mortgage and pawnbroking business since the mid-1990s, the companies were incorporated only in 2020-21.An email seeking comments on the developments sent to Tennyson, who is the managing director of Chatham Kandathil Nidhi, did not elicit any response.Deeper malaiseThe details of the Vadakara case show that while junior employees are not completely innocent, often they are not the only ones or not even the key ones in the system that are ultimately responsible.While the case has brought out the involvement of zonal management in pushing the business “by all means”, if one were to go further up the food chain, the zonal management would look up to the top management, which had given stiff business targets.“Ask the top management, the answer would be that all decisions were driven by the board of directors,” said the veteran banker quoted above. And guess who is part of the board of directors? A nominee each from the Reserve Bank of India (RBI) and the central government. In addition to these two, a shareholder director is also typically a person nominated by the government or LIC.In such a fundamentally conflicted governance set-up found in public sector banks, expecting a transparent probe or fixing of accountability will be difficult, resulting in people in the lowest rung carrying the can, say governance experts.An email seeking comments sent to the managing director and CEO of Bank of Maharashtra remained unanswered.Apart from lower-rung bank employees bearing the brunt, there are also instances where things are quietly hushed up by making the staff make good the losses. Outsourcing of handling of the ornaments to third parties like housekeeping or banking correspondents have also led to major incidents.“The recent fraud at the Vadakara branch is just the tip of the iceberg and may be an indicator of a larger systemic issue. We apprehend that there may be other instances of fraud being concealed, which is more dangerous,” said a veteran banker familiar with the matter. The RBI did not disagree.“In view of several irregularities observed in grant of loans against gold ornaments and jewellery, including top-up loans, the Reserve Bank advised SEs (supervised entities) to comprehensively review their policies, processes, and practices on gold loans to identify gaps and initiate appropriate remedial measures in a time-bound manner. SEs were advised to closely monitor their gold loan portfolios and ensure adequate controls over outsourced activities and third-party service providers,” the RBI said in its report on ‘Trend and Progress of Banking in India 2023-24’. medium118623982An August report by PricewaterhouseCoopers (PwC) said, “When it comes to fraud, spurious gold being pledged as genuine poses a significant threat, as does accepting stolen gold without clear ownership documentation. There is also the possibility that employees might accept bribes from borrowers to manipulate the loan’s terms or work with them to inflate the value of pledged gold. They could also misappropriate gold assets by substituting them with lower-quality alternatives.”Citing multiple instances of fraud in the gold loan sector that have been reported in the media over the past three years, the PwC report estimated the total value of gold in such reported incidents could amount to ₹30-35 crore. “However, these numbers may not reflect the true extent of the issue, as many cases often go undetected or unreported,” the report warned.Bankers and analysts feel a portion of these undetected cases might end up as defaults because under normal circumstances, a gold loan is risk-free, more so when the price of the underlying asset continues to go up. So, banks should ideally be able to liquidate the collateral or offer fresh loans in cases of stress. But, if this is not happening, then the quality of the collateral comes under the radar.For example, if a private financier repledging the gold of customers who have already defaulted at his end in the name of his staff or other individual names, he might not be interested in servicing these as he might have already realised the full value of the gold, given the run-up in prices. However, there seems to be a discrepancy in the amount of defaults in the system also with the regulator and the government putting out different numbers.RBI RTI vs FM’s Parliament replyIn December, the Indian Express reported that gold loan defaults have gone up by 30% to ₹6,696 crore at the end of June 2024. Of this, bank defaults stood at ₹2,445 crore, rising 62% over the previous quarter. The report was based on a right to information (RTI) reply received from the RBI. medium118624012Alarmed by these numbers, MPs Anand Bhadauria (SP) and Kanimozhi Karunanidhi (DMK) had raised queries in Parliament. The question cited the exact figures from the RTI reply and sought details. In reply, finance minister Nirmala Sitharaman informed that non-performing assets (NPAs) in the gold loan portfolio of banks had gone up by up to 21.03% in Q1 FY25. For the larger universe of banks and NBFCs, this figure was just 18.14%, the minister said, but did not disclose the exact numbers or bank-wise details.In accordance with RBI guidelines, banks and NBFCs are taking several steps to mitigate the risk involved in gold loans and to ensure the proper valuation of gold offered as collateral, she added. “Further, as on June 30, 2024, gross NPA ratio pertaining to gold loans in SCBs (scheduled commercial banks) was 0.22 % and that of upper layer and middle layer NBFCs was 2.58 %,” the minister said.However, this NPA ratio also doesn’t seem to add up. Going by the RBI figures of ₹2,445 crore, NPAs reported by banks at the end of June 2024 (on an outstanding of ₹1.23 lakh crore on the same date), the NPA ratio works out to 1.98%. That is 9x the figure given by the finance ministry. What is causing this difference?Emails sent to the RBI spokesperson and ministry officials seeking an explanation did not elicit any response immediately.The huge variance in the numbers disclosed by the RBI and the finance ministry only adds to concerns around gold loan defaults. While some ‘unlucky’ bankers seem to be counting bars, have some more fortunate ones walked away to distant shores like the Lucky Baskhar on screen?