What are gold loans? Who avails of them? What is the ticket size?
The Reserve Bank of India allows lenders to offer loans against gold jewellery.
Lenders, however, are not allowed to grant any loan against primary gold/silver (newly mined and processed gold or silver) or financial assets backed by primary gold/silver like units of Exchange-traded funds (ETFs) or units of Mutual Funds. Gold loans are fully secured, short-tenure, low-ticket loans — often repaid in 4–5 months — and primarily availed by those who cannot access formal credit elsewhere.
Street vendors, daily wage workers, tailors, home-makers, and micro-entrepreneurs typically avail themselves of gold loans.
According to industry estimates, nearly 47 per cent of gold loans are for amounts under ₹30,000, and over 65 per cent of gold loan customers have no formal income documentation. These are people with no pay slips, GST registration, or tax returns.
What are the key changes proposed by the RBI to gold loans?
The loan-to-value (LTV) ratio for gold loans is proposed be computed by treating the total amount repayable by the borrower at maturity, including the interest, rather than the loan sanctioned at origination.
Unlike traditional loans, borrowers can repay entire principal amount and interest on loan at the maturity date of loans. By including the total interest payable in the LTV calculation, the disbursable loan amount falls sharply by around 15 per cent, which leads to borrower getting lesser amount of loan for the same value of gold collateral.
The draft guidelines also propose rigorous credit appraisal, income verification, and periodic end-use checks — even for consumption loans.
Why are some political leaders opposing these loans?
Last month, Tamil Nadu Chief Minister MK Stalin wrote a letter to Union Finance Minister Nirmala Sitharaman urging her to “advise the Reserve Bank of India to reconsider the proposed restrictions.” It is important that gold continues to be accepted as collateral for agricultural and allied loans up to ₹2 lakh, as per a copy of his letter to the Finance Minister.
“This proposal is likely to result in serious disruptions to the rural credit delivery system in Tamil Nadu and across many parts of South India, where gold-backed loans serve as a primary source of timely, short-term agricultural credit, especially for small and marginal farmers, tenant cultivators, and those engaged in allied sectors such as dairy, poultry, and fisheries,” Stalin said in his note.
What is the gold loan industry’s stance regarding the changes proposed by the RBI?
Bankers, on their part, have reached out to the RBI for relaxing certain provisions in the final gold loan circular. They argue that gold loan industry already follows strict KYC norms and maintains collateral transparency and additional documentation will slow down lending and hike operating costs.
They suggest retaining the current LTV calculation method for bullet loans and accepting borrower declarations for their repayment capacity and end-use for smaller ticket size gold loans.
What do experts say about the draft gold loan norms?
According to Crisil Ratings, the draft guidelines pertaining to LTV ratio and renewal/top-up of bullet loans, if implemented in their current form, can slow down the loan growth of non-banking financial companies (NBFCs) focused on gold loans.
Says Malvika Bhotika, Director, Crisil Ratings, “If implemented in current form, the directions on LTV computation and breaches thereof can impact the growth prospects of gold-loan NBFCs as they will have to recalibrate their disbursement values. For bullet loans, we expect the LTV at disbursement to reduce from 65-68 per cent currently to 55-60 per cent to factor in accrued interest and ensure LTV compliance. NBFCs may also look at periodic interest collection from their customers to manage LTVs. Alternatively, they may decide to focus on EMI1-based products.”