RISK MANAGEMENT

With special reference to gold loans

RISK MANAGEMENT:
Risk management refers to the practice of identifying potential risks in
advance, analyzing them and taking precautionary steps to reduce/curb the risk.

GOLD LOAN:
Gold loan or loans against gold is the easiest and quickest way for serving
financial needs. The gold is required to be pledged to avail loan. The loan amount is
determined on the gold pledged and the prevailing market price.

DCB Bank is a modern emerging new generation private sector bank with 130 plus branches
across 17 states and 2 union territories. It is a scheduled commercial bank regulated by the
Reserve Bank of India. It is professionally managed and governed. DCB Bank has
contemporary technology and infrastructure including state of the art internet banking for
personal as well as business banking customers.
At DCB the gold loan segment is classified as:

Gold Loans
term loans

over drafts

EMI's

Term loans:
A loan from a bank for a specific amount that has a specified repayment schedule and a floating
interest rate. Maturity level of term loan is less than a year.

Due to technical difficulties this term loan segment has removed as the client cannot access to
account after the tenure of loan

Overdrafts:
The loan amount is granted and is withdrawn only as per the requirements of the client and
interest is only charged only on the amount withdrawn.

EMIS:
A fixed payment amount made by a borrower to a lender at a specified date each calendar month.
Equated monthly instalments are used to pay off both interest and principal each month, so that
over a specified number of years, the loan is paid off in full.

Features of loan:
1.
2.
3.
4.
5.
6.

Loan available to individual in age group of 18 to 70 years.

Loan amount ranging from Rs. 25000 to 10lacs
If loan amount is more than 10 lacs CIBIL report is to be submitted
Gold loans are provided to all purposes except for trading/purchasing gold.
Working finance provided to jewellers is excluded.
Loan to value:
Loan is valued based on 75% of value of gold pledged for already existing customers
and 70% to new customers.
7. Processing fee is charged at 1% on loan and 0.5% for renewals.
8. Return on investment is made @17% for loan amount < 2lacs
@15% for loan amount >= 2 lacs
@13% for priority sector

PROCEDURE FOR GOLD LOAN:

1. Customer interaction sheet is to be filled, where the purpose of loan is identified.
2. Loan documents are to be filled and submitted.
3. ISA documents are essential for opening an account and to assess the identity of
client.
In addition a statement of transactions for 6months are analysed to assess the
repayable capacity of client.
4. Valuation of gold:
Valuation of gold is done by valuers recognised by bank. Kasauti is
done for each and every ornament to determine the purity of each and every
ornament
Two valuers are appointed if the loan amount is >-7.5 lakhs
5. Report :
Report is to be prepared in triplicate, containing every detail of gold pledged,
gross weight, net weight, amount granted for the loan etc.,
6. Seal :
The valued gold is sealed is a plastic cover in presence of client signed by valuing
officer, client, operation manager and also two custodians.
7. RAOU team verifies complete documentation.

** Customer assessment form is mandatory which determines the repayable capacity of

client.
** Calibration of machinery is done every year so as to assess that the machine which
determines the weight of gold is in good condition.

RISKS ASSOCIATED WITH GOLD LOANS:

1. Ownership of ornaments:

Ownership associated with the ornaments to be pledged is to be

recognised.
Banks should satisfy itself about the ownership of the goods before
accepting them for pledge
It helps in assessing the repayable intention of client

Measures:

Bank would obtain a declaration from the borrower that the ornaments
are his own property and that he has the fullest right to pledge them to
the bank
In case, if sreedhan is being pledged declaration form of respective
person is to be submitted.

2. Appraiser:

There is a chance of valuer getting mixed up with client and give

wrong report which is a risk to bank

The bank should see that valuer is in no way related to client

Valuation of gold to be done by approved valuers of the bank to avoid
further complications associated with the frequent changes of valuers

Measures:

3. Valuation report:

The report of all ornaments pledged is to be given, which avoids

further complication during repayment .

During valuation kasauti is to be done.

Gross weight , net weight of pledged gold is identified and loan
amount is determined based on this

Measures:

All the pledged items are recorded and duly sealed in presence of client
and two custodians in presence of operations manager.
4. Security:

Before granting any loan banker have to scrutiny the client in order to
prevent him using bank intentionally or unintentionally for criminal
purpose.

Measures:

Customer interaction sheet serve the purpose as it identifies the

purpose of loan.
AQB statement and cheque returns helps to identify the authenticity
of client in repayment
Address proof , identity proof helps to identify the identity of client.

5. Default risk;

Repayable capacity of client is identified before granting loan to client.

In case if client is not in a position to repay loan then the gold is auctioned after
giving appropriate prior notices.

6. Change in gold prices;

As the gold prices vary from time to time the loan amount is required
to be revised appropriately.
If gold prices decrease then bank is at a risk as it has valued gold more
than its value.
In order to avoid this banks usually revise the account every year based
on prevailing gold prices.

7. Risk of taking more loans from one or more branches:

In case if client already has loan in other branch prior approval of that
branch is to be taken before granting the loan amount.

8. Calibration of machinery is to be done every year in order to check the working

condition of machinery.