On April 9, 2025, the Reserve Bank of India (RBI) released a draft notification titled ‘RBI (Lending against Gold Collateral) Directions, 2025’. As is customary, the draft was opened for public comments and stakeholder feedback.
In the past week, a sudden and intense debate has erupted — primarily in Tamil Nadu. Politicians across party lines have urged the RBI to withdraw the “new conditions” on gold loans, citing their potential impact on poor and middle-class families who rely on such loans during emergencies. It is worth noting that these are draft guidelines, not final rules.
Much of the criticism appears to stem from a misunderstanding — or misrepresentation — of the draft notification. To understand the RBI’s intent, it’s helpful to refer directly to its communication:
“The Reserve Bank has restricted lending against primary gold/gold bullion due to broader macro-prudential concerns as also due to the speculative and non-productive nature of gold.”
However, it has allowed lending against gold jewellery and ornaments to meet short-term financial needs. The RBI emphasised that current regulations aim to:
“...provide borrowers an avenue to tide over tight liquidity conditions by leveraging idle gold jewellery, while simultaneously addressing risks for the lenders.”
Rising Risk
Over the past year, gold prices have surged significantly, which has driven a sharp increase in gold loan portfolios. This trend raises concerns about potential market corrections and increased credit risk.
The total outstanding gold loans — including those from banks and NBFCs — stood at ₹11.11 lakh crore in December 2024, a 27.26 per cent rise from ₹8.73 lakh crore in December 2023. Per data presented in Parliament, gross non-performing assets (NPAs) from gold loans in scheduled commercial banks and NBFCs rose by 18.14 per cent between March and June 2024.
The draft guidelines introduce a clearer distinction between:
• Consumption loans – For emergencies, medical needs, consumer purchases, etc. These do not generate income.
• Income-generating loans – For business or productive purposes. These loans 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.
Key Provisions
Proof of ownership: RBI mandates that lenders verify the ownership of pledged gold. If original purchase receipts are unavailable, borrowers may provide a declaration explaining ownership. This measure is crucial to prevent pledging of stolen jewellery, which does not create a valid legal pledge.
Loan tenure: The draft caps the tenure of consumption loans (particularly bullet loans) at 12 months. This aims to ensure that such loans remain short-term and emergency-oriented. While this may affect borrowers used to rolling over loans through interest payments, it is not a ban on renewals — banks may allow renewals if interest is serviced regularly.
Loan-to-Value (LTV) ratio: The maximum LTV ratio for gold loans is proposed at 75 per cent, applicable to both banks and NBFCs.
This is a protective measure for both lenders and borrowers:
• Higher LTVs reduce the margin of safety.
• In a price fall, low-margin loans are more likely to result in jewel forfeiture and forced auctions.
• A lower LTV helps maintain borrower commitment and protects asset value.
Valuation/Appraisal of Gold: Contrary to claims by some politicians and union leaders, the RBI has not proposed mandatory external appraisers. The guidelines simply state:
“Lenders shall appoint qualified assayer(s)/valuer(s), who do not have any negative records.”
This allows banks to continue using their existing appraisers — whether internal or contracted — provided they meet basic quality standards.
Return of collateral: A borrower’s gold jewellery must be returned within seven working days of full loan repayment or settlement.
Surprisingly there is no comment or objection to this provision. Once the loan is closed, there is no need to hold the securities and on the same day or at the most within a day the lenders must be able to release the jewels.
The RBI’s draft guidelines are aimed at risk mitigation and financial discipline in the gold loan segment. Unfortunately, the public discourse has been clouded by misinformation and political posturing.
The writer is a retired banker