Draft Gold Loan Guidelines: Streamlining the Ecosystem or Derailing Growth Momentum?

Growth story of the Gold Loan category

India’s gold loan market is glittering brighter than ever. As per Reserve Bank of India (RBI) data released on February 28, the gold loan portfolio saw a jaw-dropping growth of % in January 2025—a massive leap compared to 17.4% in the same period last year. Outstanding gold jewellery loans stood at ₹1.79 lakh crore as of January 24, 2025, a steep rise from ₹1.01 lakh crore in 2024 and ₹86,133 crore in 2023.

What’s Driving This Gold Rush?

1. Skyrocketing Gold Prices

Gold prices in India soared to ₹98,000 approx. per 10 grams in April 23, 2025, up from around ₹62,690–₹64,090 in early 2024. This spike allows borrowers to get larger loans by pledging less gold. However, this also brings risks—if prices fall, borrowers could face challenges repaying or securing further credit.

2. Why Are People Turning to Gold Loans?

1. High Interest Rates Elsewhere: With borrowing costs rising for other loans, gold loans—known for lower interest rates and quick processing—are becoming a preferred choice.
2. Credit-Friendly: Gold loans require collateral, making them accessible even to those with weak credit scores or thin banking history.
3. Seasonal Demand: The festive and wedding season in January drives demand for funds to cover big-ticket expenses like ceremonies, gifts, and travel.

Market Outlook: Gold Loans Poised to Hit ₹15 Trillion

A recent ICRA report (dated September 25, 2024) projects that the gold loan portfolio of banks and NBFCs could exceed ₹10 trillion this fiscal, reaching around ₹15 trillion by March 2027.

1. Banks remain dominant players thanks to their agriculture-linked gold loans.
2. NBFCs, leaders in retail gold lending, are expected to grow by 17–19% in FY2025.
3. The good news? Credit costs remain low, below 0.5% over the past five years, thanks to collateral-backed lending and timely auctions.

But It’s Not All That Glitters…

In the recently concluded February Budget Session 2025, details of GNPAs were table before the house, which are as follows:

• From March to June 2024, GNPAs in gold loans rose 18.14%.
• As of June 30, 2024:
  1. Scheduled Commercial Banks had a gold loan GNPA ratio of 0.22%
  2. NBFCs (Upper & Middle-Layer) saw a much higher 2.58%

Edge: Why Borrowers Love Gold Loans

Lenders are going all out to attract borrowers with:

1. Low or no prepayment charges
2. Daily repayment options
3. Interest charged only on outstanding balances
4. Flexible repayment, including bullet payment options

How different are the Draft Guidelines from present directions and practices?

The new guidelines are intended to apply uniformly to all lenders involved in gold loans (including banks, small finance banks, etc.), contrasting with the existing directions that primarily focus on NBFCs. Recognizing the sector’s importance and its recent rapid expansion, the RBI has proposed draft guidelines aimed at standardizing and regulating gold loan practices across all financial institutions. The current Gold Loan directions are primarily detailed in the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023. The following outlines the proposed changes in the draft directions compared to the existing ones:

a. End use of the Loan

Unlike the current gold loan conditions, the draft directions mandate that lenders establish a system to monitor the end use of funds, aligning it with standard commercial loan practices. According to the draft directions, the end use of a loan is categorized into two types: (a) income-generating loan and (b) consumption loan. For income-generating loans, lenders will be required to maintain documentary evidence confirming that the funds are utilized solely for that specific purpose. Furthermore, a single loan cannot be granted to a borrower for both purposes.

Impact: Once implemented, lenders will need to modify their loan application forms to ascertain the loan’s purpose and concurrently enhance their internal control systems to track the end use of funds.

b. Loan-to-Value (LTV) ratio

Currently, the Loan-to-Value (LTV) ratio, which represents the maximum percentage of the gold’s value that can be loaned, is capped at 75% for NBFCs lending against gold jewellery. Typically, lenders assess this ratio at the time of loan origination but not subsequently. However, during their annual inspections, the RBI directs these lenders to maintain the LTV ratio at all times until full repayment. The draft directions explicitly state that the 75% ceiling must be maintained continuously throughout the tenor of the loan. However, there are different stipulations for banks and NBFCs in the draft directions:

1. Consumption Loan: An LTV ratio of 75% shall be followed by all lenders,
2. Income-Generating Loan: An LTV ratio of 75% will apply only to NBFCs, while other lenders (including Banks) may, at their discretion, adopt a more flexible ratio as defined in their internal credit policy.
3. Loan having a condition of bullet repayment: subject to the above conditions, an LTV ratio shall be calculated based on the total amount payable at the end of the tenor instead of its commencement.

In case of any breach in the LTV Ratio for more than 30 days, lenders are required to make an additional 1% standard asset provisioning in their books, which can only be reversed once LTV ratio remains within the limits for more than 30 days. Further, no renewal is allowed if any loan is in breach of LTV ratio.

Impact: The draft directions place banks in a more advantageous position compared to NBFCs, which are bound by the 75% LTV ratio. Lenders’ profitability might be affected due to the mandatory additional provisioning, especially given the fluctuating and currently high gold prices, which are unlikely to remain at these levels indefinitely. A decline in gold prices could particularly impact some lenders, especially NBFCs.

c. Enhanced customer diligence exercise

Unlike under existing norms, the draft directions cast more responsibility on the lender to carry out customer due diligence activities. Such as:

1. Repayment capacity: Generally, lenders check the strength of the collateral gold instead of the customer’s ability to repay as they think their money is secured in the form of a gold loan, which can be recovered in the auction.
2. Bullet Loan: The tenure for consumption-based bullet loans will be capped at 12 months.
3. Ownership: Loans cannot be extended against gold where ownership is uncertain, to prevent lenders from engaging in suspicious transactions.
4. Maximum limit of Gold: The total amount of gold that can be pledged as collateral by a single borrower across all lenders will be capped at 1 kg.
5. Income-Generating Loan: The loan amount and tenure for income-generating loans must be determined based on the economic activity for which the loan is taken, not solely on the value of the gold.
6. Loan renewals or top-ups: The lender can only renew the existing facility upon the formal request made by the borrower, provided such existing facility is standard one and LTV will not be breached after the top-up.
7. Credit limits: Draft directions require lenders to frame a policy on the limits of exposure of gold loans towards total advances, which needs to be monitored periodically. Further, out of gold loans, the policy also provides for exposure limits of a single borrower under the category of consumption or income-generating loans.

Impact: If these draft directions are adopted as proposed, lenders will need to make significant changes to their internal loan application processing and disbursement policies. Consequently, loan disbursement may be delayed due to the addition of steps such as evaluating the prospective borrower’s repayment capacity and the economic activity or assets for which the loan is intended.

d. Collateral management, its release and auction process

The draft directions have prescribed material changes in the valuation of collateral gold, auction process while maintaining transparency and disclosure with the borrowers.

1. Valuation norms: The valuation of collateral shall be carried out by a qualified assayer/ valuer who does not have a negative record in the past. The valuation shall be carried out in the presence of the borrower. Besides, methodology of valuation shall be disclosed on the website of the lender.
2. E-certificate: The lender can now issue an e-certificate to the borrower, wherein details of the collateral gold will be mentioned such as purity in terms of carats, gross and net weight of gold, image of collateral, value of collateral arrived, name of the valuer, etc.
3. Release of Collateral: Upon repayment of the full loan, the lenders must release the collateral gold within 7 working days. In case of any delay, the lender shall be liable to pay penalty of Rs. 5000/- per day till the date of release to the borrower, where the delay is caused due to default on the part of the lender.
4. Reserve Price: As per existing norms, the reserve price of collateral shall not be less than 85% of the current value declared by Bombay Bullion Association Ltd. Or spot gold price data published by Forward markets Commission whereas in the draft, the reserve price shall not be less than 90% of current value declared by India Bullion and Jewellers Association Ltd. or the historical spot gold price data publicly disseminated by a commodity exchange regulated SEBI.

Impact: The draft directions signal a move towards a more regulated, transparent, and borrower-centric approach to collateral management in the gold loan sector. While this might increase compliance costs and require adjustments in their current practices, it is expected to lead to a more robust and trustworthy gold loan ecosystem in the long run, potentially mitigating risks associated with collateral handling and borrower disputes.

Conclusion

In conclusion, the proposed draft RBI guidelines for gold loans represent a significant shift towards a more harmonized and stringent regulatory framework for both NBFCs and banks. Key differences from the existing guidelines for NBFCs include the shift to ongoing LTV monitoring, stricter norms for collateral acceptance, more transparent auction procedures, enhanced disclosure requirements, explicit classification of loans based on end-use, and mandatory end-use monitoring. These changes are likely to impact NBFCs’ operational procedures by increasing complexity and requiring investments in technology and training. Profitability could be affected by potential slower growth, higher compliance costs, and the need for increased provisioning. Strategically, NBFCs might need to reassess their lending practices, focus on borrower repayment capacity, and explore diversification options. The sector is experiencing rapid growth, with projections indicating a substantial increase in AUM in the coming years. Future trends point towards greater formalization, increased adoption of technology, and potentially intensified competition.