RBI’s ‘golden’ rules for lenders (2025)

GLITTERING COLLATERAL: Weighing the pros and cons of the gold loan biz| Photo Credit:Dhiraj Singh

Gold loan is sought after not only by the economically weaker classes but also many middle-class families and small businesses in need of emergency credit. Non-banking financial companies (NBFCs) and banks have built up sizeable portfolios in this line of business.

The ease of obtaining credit, a purpose-agnostic yet hassle-free process, and the northward prices helped grow the book fast, particularly in the last few years. However, there is no comprehensive regulatory framework for gold loans to ensure a level playing field, fair practices and customer protection. While the draft directions released by the Reserve Bank of India bring in clarity and bridge gaps in regulations, a few of the proposals are in need of tweaking.

In gold loans the dividing line between systematic renewals and evergreening is thin. The draft proposal envisages aligning regulations with the market while also ensuring the renewal process remains prudential for the business. It suggests that loan renewals and top-up loans can be sanctioned if existing loans are classified as standard, subject to permissibleloan-to-value (LTV) ratio and after repayment of the interest accrued.

The draft directions provide definitional clarity in many grey areas. It distinguishes between ‘jewellery’ and ‘ornaments’ and caps the loan eligibility against ornaments. The old classification of ‘agricultural’ and ‘non-agricultural’ loans gives way to a broadened approach of loans for ‘income-generating activities’ and ‘consumption’, respectively. This eases frictions in credit flow to income-generating activities.

A proposal that may affect the volume of business of some regulated entities is the ban on loans against re-pledged gold collateral. This certainly is a prudentialmove, given the likely risk of unorganised origin of the first pledge.

Where the shoe pinches for regulated entities is in ensuring optimal credit appraisal and due diligence in all cases. While the intent is unquestionable, the requirement may have the unintended consequence of keeping out bottom-of-the-pyramid borrowers, such as vegetable or milk vendors, women borrowers running small shops, and other small businesses that use gold as the only available collateral for working capital.

It may be well-nigh impossible for lenders to ensure watertight monitoring of the end-use and documentation of these small loans. To promote financial inclusion, especially for those at the margins, a relaxed norm may be considered below a certain threshold.

The requirement for lenders to keep a verification record of the ownership of collateral could pose problems in the case of inherited gold, which may not have any ownership record.

The draft proposal rightly empowers regulated entities (read banks) to fix a policy-based LTV ratio for income generating loans. The LTV ratio in the case of consumption gold loans is capped at 75 per cent. However, there can be no level playing field with the prescribed LTV ceiling of 75 per cent for all gold loans sanctioned by NBFCs, irrespective of loan purpose.

Income-generating loan

Lenders will be free to decide the size of their gold loan portfolio in proportion to overall loans and advances. The proposal to classifyan income-generating loan primarily based on the purpose, and not as gold loans, will help regulated entities meet their lending target for the micro, small and medium-sizedenterprises (MSMEs) segment. The need to create a charge on the primary security for such loans, in addition to the pledge/ charge on gold collateral, could pose on-ground operational difficulties when non-bank customers apply for top-up loans.

The RBI has also, in keeping with the policy of harmonised regulations, brought in a level playing field for gold valuation. All valuations for gold loans shall be based on the price of 22-carat gold. Collateral of lower purity shall be converted to equivalent of 22-carat purity. Pricing will be based on quotes from the India Bullion and Jewellers AssociationLtd or the historical spot gold price data from commodity exchanges.

The RBI has placed the customer at the centre of these proposals, which is a welcome step. Gold loan policy and key fact statement should be given to the borrower against an acknowledgement. Lenders, while accepting gold collateral, must prepare a certificate or e-certificate, which will go a long way in ensuring a fair deal to the customer. The maximum time to release gold after loan repayment is seven working days; penalty for violation is ₹5,000 per day.

The prescription that no third-party can handle gold collateral, to avert potential frauds, could impact the doorstep services provided by NBFCs that use third-party services.

A deputy governor once famously said, “If it looks like a duck, quacks like a duck, and acts like a duck, then it probably is a duck —and should be regulated as a duck.” The RBI appears determined to treat a duck that lays golden eggsfor many a regulated entity, as indeed a duck. The system will undoubtedly be better for it.

(The writer is former Executive Director, RBI. Views are personal)

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Published on April 27, 2025