Banks of Straw, Gold of Clay

India’s gold-loan scandals expose the fragility of trust inside its public-sector banks.

Trust is the currency that makes banking possible. But in India’s sprawling state-run lenders, that trust is being squandered not by cunning outsiders but by the very insiders paid to safeguard it. The latest example comes from Canara Bank’s Mint Street branch in Chennai where a routine audit in April uncovered that Rs. 2.38 crore had been siphoned off against fake gold collateral.

The anatomy of the scam is depressingly simple. Between October 2024 and March 2025, the branch sanctioned 21 loans against imitation jewellery. The branch manager choreographed the fraud. A gold appraiser, whose job is to verify purity, obligingly declared the trinkets genuine. An accomplice played the role of customer, pledging the fakes for cash. In barely six months, crores were drained from the bank’s coffers. Nobody noticed until an internal inspection belatedly stumbled across the rot.

This was no one-off aberration. In the past year alone, the same story has replayed with minor variations. A branch of Canara in Labbaikudikadu, Tamil Nadu, was defrauded of Rs. 1.2 crore. Union Bank lost Rs. 2.35 crore when 5.5kg of bogus gold was pledged. In Karnataka, Canara’s Managuli branch saw a staggering Rs. 53 crore evaporate in another gold-related swindle. Across cases, the script is identical: collusion by insiders, appraisal based on ritual rather than science, and audits that react only after the loot has vanished.

Sacred Bridge

Gold loans are no fringe product. They are the beating heart of India’s retail credit market, worth nearly Rs. 1.45 trillion in Canara Bank’s books alone. For millions of families, they are the bridge between need and liquidity. The ornaments pledged are not inert assets but repositories of culture: bangles worn at weddings, chains passed down from grandmothers, jewellery bought to mark religious festivals.

Customers part with these heirlooms in the belief that banks will treat them with meticulous care. When employees collude to loot the system, they are not merely falsifying entries on a balance sheet. They are desecrating the sentimental trust households place in the system.

The irony is that in an economy where vegetable sellers and auto-rickshaw drivers now demand QR code payments verified in seconds, public-sector banks still appraise pledged jewellery using primitive methods. A necklace worth lakhs is rubbed on a touchstone, examined through a loupe and declared genuine. Rarely does it pass through a spectrometer or any foolproof machine test. In such an environment, the opportunity for fraud is not a loophole. It is an open door.

Rising gold prices only sharpen the incentive. In the past year, prices have soared by 44 percent, from Rs. 52,000 to Rs. 75,000 per sovereign. For crooks, each gram of pledged gold (real or fake) represents a richer opportunity than before. Unless banks modernise their practices, they will continue to be easy prey for those who know how to exploit them.

Uncomfortable Truths

Three realities stare the system in the face. First, the greatest threat to India’s banks is not faceless cyber-hackers operating from afar but their own employees, who know precisely where the weaknesses lie. Second, the audit culture in public-sector banks has become more ceremonial than preventive: a box-ticking exercise that provides comfort to headquarters while leaving branches exposed. And third, penalties for insider fraud remain so lenient that they are no deterrent at all.

If faith is to be rebuilt, several obvious reforms must follow. Technology must become mandatory. No gold loan should be sanctioned without testing through X-ray fluorescence spectrometers or equivalent devices. Guesswork is no substitute for science, and in banking, as in medicine, diagnosis by feel is malpractice. Unless a machine confirms purity, the loan should not proceed.

The cosy circuits of collusion must be broken. Appraisers and managers should not remain in the same branch for years, where familiarity matures into conspiracy. Routine rotation of staff is not a mere administrative chore; it is a firewall against entrenched partnerships of fraud.

Approval systems must be fortified with double locks. No single official should be able to sanction a gold loan unchecked. Every transaction should be validated by two independent officers, ideally from different branches, before funds are released. Only such safeguards ensure that a lone dishonest employee cannot open the vault on his own.

Audits themselves must evolve from ceremony to surprise. Inspections announced months in advance serve little purpose beyond allowing branches to polish their files. Unpredictable raids, timed irregularly, are the only way to catch fraud in the act.

Punishments must be deterrent rather than symbolic. Quietly allowing a crooked official to resign, or dismissing him with pension benefits intact, is not justice but an exit plan. Insider fraud should trigger swift prosecution, seizure of illicit assets, and custodial sentences that demonstrate the seriousness of the offence.

Nor can customers remain passive. Borrowers should be encouraged to demand receipts, question procedures, and insist on the credentials of those appraising their jewellery. A more informed borrower is also a less vulnerable target.

Economic Sabotage

The responsibility cannot rest solely with lenders. Police forces must learn to treat financial fraud as economic sabotage, not petty theft. Judicial processes must accelerate, for delayed justice is no justice at all. Human-resource departments must vet recruits more rigorously for ethical fitness. And behavioural specialists, often employed in the private sector, could be deployed in banks to identify employees whose conduct betrays early signs of compromise.

None of this is novel. India’s financial history is littered with cautionary tales that show what happens when systemic vulnerabilities are ignored. In the early 1990s Harshad Mehta manipulated securities markets with impunity, shaking the very edifice of the Bombay Stock Exchange.

In 2018 Nirav Modi orchestrated a $2bn fraud involving letters of undertaking at Punjab National Bank, another state-owned giant. Both cases began with what appeared to be minor lapses but snowballed into crises that dented confidence across the system.

Compared with those scandals, the Mint Street fraud seems small beer. Canara’s Rs. 2.38 crore loss is a drop in its Rs. 1.45 trillion gold-loan book. Yet reputations are not measured in crores but in credibility. Each insider-led scam chips away at the foundations of depositor faith. If unaddressed, today’s petty frauds will escalate into tomorrow’s mega-scams, counted not in crores but in hundreds of crores. And when they do, the public’s response will be as predictable as the crime itself: formulaic apologies from the bank, pledging corrective action, while trust erodes further.

Fragile Legacy

For ordinary families, gold remains more than a commodity. It is the ultimate store of value, sometimes the only one they can rely upon. They approach banks with heirlooms in hand because they assume these institutions embody probity, professionalism, and safety. That belief is fragile. Each new scandal, however small in scale, undermines it.

State-run banks in particular must rediscover their spine. They must show they are guardians of public wealth, not playgrounds for colluding officials. Technology, accountability, and deterrence must replace ritual, complacency, and leniency. Otherwise, the gold loan, once a pillar of Indian household finance, will become synonymous with fraud.

The glitter of gold has long been entwined with India’s identity. If banks fail to protect it properly, that glitter may yet turn to dust.

(The writer is a retired banker based in Bengaluru. Views personal)