RBI gold loan draft rules: What are RBI’s new draft rules for gold loans, why govt wants small borrowers exempt

To address urgent need for money, loans against gold remain a popular choice across India. The RBI has told banks that loans can only be offered against gold jewellery and bank-issued coins, and not against gold bars, ingots, bullion, etc. What other changes has the RBI proposed, and why? We explain.

Why is the RBI changing gold loan rules?

The RBI is changing gold loan rules because lots of people are borrowing against gold as the value of the precious metal shoots up. The current price of 24-carat gold in India is Rs 95,760 per 10 gm. For 22-carat gold, the price is Rs 87,780. With the number of gold loans going up, NPAs — non-performing assets; when a loan can’t be repaid, it becomes an NPA — are going up too. In absence of proper guidelines, such a scenario can hurt both lenders and borrowers.

The Indian Express has earlier reported that gold loan NPAs of Rs 2,040 crore were reported by commercial banks as of December 2024, up from Rs 1,404 crore a year ago. Finance companies involved in gold loans accumulated NPAs worth Rs 4,784 crore as against Rs 3,904 crore last year, the RBI said in its reply to an RTI application filed by The Indian Express.

On the surface, gold loans seem fairly straightforward: in case of default, the lender can auction off the gold and recover the money. However, things aren’t that simple.

While the loan money may have helped the borrower meet her immediate need, failure to repay shows continued financial strain. If the jewellery is auctioned off, the borrower loses an asset, apart from damaging her credit ratings. Also, in Indian households, gold often has a high emotional value attached, so the loss is more than financial.

For lenders, if the gold was not valued properly; or the loan amount was too high with respect to the value of the gold (something called loan to value or LTV ratio); or if gold prices crash, the full value may not be recovered. Also, if too many gold loans default, the lender could face a liquidity problem, as the auctions are a lengthy process.

The RBI’s draft guidelines seek to address all these concerns.

What are RBI’s new rules for gold loans?

Here are the key changes the RBI has laid out in the draft guidelines.

LTV ratio: The RBI has said that the “maximum LTV ratio in respect of consumption gold loans shall not exceed 75 per cent of the value of gold”. LTV ratio is calculated by dividing the loan amount by the value of the gold jewellery or coin.

Assessing the value of the gold: The RBI has said that lenders have to put in place a standardised procedure to assay the purity of gold collateral, and only qualified assayers with no negative record can perform this function. The borrower must be present during the assaying of the collateral.

“Gold accepted as collateral shall be valued based on the price of 22 carat gold. If the gold collateral is of purity less than 22 carats, the lender shall translate the collateral into the equivalent of 22 carat purity, and accordingly value the collateral. In other words, collateral of lower purity of gold shall be valued proportionately.

For this purpose, the lower of (a) the average closing price of 22 carat gold for the preceding 30 days, or (b) the closing price of 22 carat gold on the preceding day, either as quoted by the India Bullion and Jewellers Association Ltd. or the historical spot gold price data publicly disseminated by a commodity exchange regulated by the Securities and Exchange Board of India (SEBI) shall be considered,” the RBI release says.

Silver accepted as collateral will be valued at 999 purity silver prices.

Proof of ownership: Loans can’t be extended against jewellery whose ownership is doubtful. If the original bill of sale is not available, the borrower will have to submit a declaration explaining the ownership of the jewellery or coin.

Purpose of the loan: Rules are slightly different for consumption loans (loan to satisfy an immediate consumption need, such as medical bills, buying something) and income generating loans (where the loan money will be used for some sort of moneymaking activity, including farm loans).

In case of income generating loans, the lender has to monitor what the money is being used for. This requirement kicks in for consumption loans above a threshold amount decided by the lender.

If a consumption loan is a ‘bullet loan’ (where both the principal amount and the interest are due at the date of maturity) will be capped at 12 months.

Also, the RBI says, “Income generating loan shall primarily be categorised as per the purposes for which they are extended and shall not generally be categorised as gold loans. The quantum and tenor of income generating loan shall be assessed on the basis of credit requirement and cash flows likely to be generated through the economic activity and not on the basis of value of the collateral.”

Importantly, the same eligible gold collateral “shall not be used concurrently for extending loans for income generating purposes as well as consumption loans, notwithstanding the value of the collateral.”

How much gold can you pledge for a loan?

The aggregate weight of either gold or silver ornaments pledged for loan shall not exceed 1 kilogram per borrower, the RBI says. In case of coins, the aggregate weight is capped at 50 grams per borrower for gold coins, and 500 grams per borrower for silver coins.

If lenders extended loans on huge quantities of gold, too much of their money would be tied to one asset, and the risk of money-laundering would go up too.

The RBI has also said that lenders can’t extend loans against re-pledged gold collateral. The same piece of gold can be used to avail a loan again only when all dues of the previous loan, including interest, arrears, and principal, have been paid off.