One of the common modes of raising loans amongst the relatively lower income sections of the population in India is through pledging gold to banks or NBFCs (and, of course, informal lenders).
For perspective, as of FY25, the outstanding gold loan book size in India was as much as ₹2.1 trillion, an increase of over 103 per cent year-on-year. Silver, too, is another metal that is used to avail loans.
Given the importance of the yellow metal, and silver in shoring up the finances of many borrowers, the RBI recently came out with a new set of directions on some key aspects of these transactions.
Specifically, on the collateral (gold in various forms), valuation, loan repayment terms, auction details, communication of terms and conditions, prior intimations to customers, damages during custody and penalties for returning the pledged gold are some aspects covered in the new RBI directions.
The new norms will have to be complied with latest by April 1, 2026. Gold loans sanctioned till that date will continue to follow the present rules.
Here are the key details that gold loan borrowers must understand before pledging their wares.
Valuing the pledged
The RBI has clearly specified what can be pledged with banks or NBFCs. Only gold jewellery, ornaments and coins can be pledged for getting loans from lenders. Gold ETFs and mutual funds are expressly prohibited by the regulator from being offered as collaterals.
The gold loan rules stated here are for consumption loans: for short-term financing needs of borrowers by placing gold as collateral.
For gold loans of up to ₹2.5 lakh, lenders are not to seek a detailed assessment of the borrower’s repayment capacity or credit history. This helps new-to-credit persons or those off the formal lending grid to avail loans. But, for amounts above the aforesaid threshold, a thorough check of the credit history is required.
The next important aspect is the loan-to-value (LTV) calculation. For gold loans of up to ₹2.5 lakh, the LTV is as high as 85 per cent. For ₹2.5 lakh to ₹5 lakh, the LTV is 80 per cent, and for amounts greater than ₹5 lakh, the loan-to-value is 75 per cent.
While valuing the gold, only the gold or silver contained in the collateral is to be considered. Precious stones or gems added to the jewellery or ornaments should not be added to the gold portion’s value.
When ornaments are pledged, the maximum weight that can be pledged in the case of gold is 1 kg and for silver, it is 10 kg.
In the case of coins, the total weight allowed is 50 gm for gold and 500 gm for silver.
Aiding borrowers
When borrowers apply for gold loans, all the terms and conditions must be clearly explained either in the regional language or that of the person availing the loan. The procedures must be standardised across all the branches of a lender throughout the country.
Bullet repayments, where the principal and interest are repaid together at the end of the tenor, must be done within one year.
If there are any damages in the ornaments/jewellery during the tenor of the loan, the repair charges are to be borne by the lender, so is any loss of the collateral (gold) during the pendency of the loan or during auctions
The lender is expected to return the pledged collateral to the borrower on the same day of loan settlement. The maximum period allowed in this regard is seven working days. Any delay in returning the gold to the borrower beyond this timeframe will mean payment of ₹5,000 per day in penalty. All delays must be promptly communicated to the borrower with the associated reasons.
When a borrower defaults, the lender is allowed to auction the pledged gold, after giving due notice.
Now, there are specific norms laid out for conducting the auction as well.
The lender should set the reserve price for the auction at not less than 90 per cent of the value of the pledged gold’s current value.
In case the auction fails to generate bidding interest twice, the reserve price can be set at a lower 85 per cent of the current value.
The first auction must be conducted in the physical format in the district where the branch that gave the loan is located. Subsequent auctions can be conducted either online or in nearby districts. Related parties to the bank cannot participate in the gold auction process to avoid conflict of interest.
Any surplus amount generated from the auction, which is above the loan value, must be handed over to the borrower within seven working days from the receipt of full auction proceeds. In case there is a deficit after the auction, the lender can recover the dues in keeping with the loan agreement.
Overall, the processes of taking the loan, repayment and auction have been streamlined and made customer-friendly by the RBI via these directions.
