The Reserve Bank of India (RBI) has issued a new draft framework for gold loan. These draft regulations are aimed at enhancing risk management, standardising lending practices and ensuring responsible credit flow by banks and non-bank lenders (NBFCs).
These proposed rules will apply to all types of lenders i.e. banks, NBFCs, co-operative banks and regional rural banks (RRBs). The RBI has invited public feedback before finalising the new framework.
As we know, it is necessary to provide collateral for many loans. Banks and gold financing companies provide loans to borrowers against gold as collateral as well. And anyway, when the gold kept at home can be useful at the time of need, then taking a loan by keeping it as collateral can be a wise step.
Existing norms for gold loan collateral
BankBazaar CEO Adhil Shetty gives his insights on the existing rules for gold loans backed by collateral and also on which gold assets cannot be pledged with financial institutions for gold loan.
Lenders can offer gold loans against gold jewellery and specially minted gold coins sold by banks (up to 50 grams per borrower), says Shetty. However, several gold-linked assets are not eligible as collateral, and these include gold bars (bullion), silver, and financial assets backed by primary gold/silver, such as units of gold ETFs and gold mutual funds, according to him.
RBI draft guidelines on gold loans
Banks and financial institutions “shall not grant any advance against primary gold/ silver or financial assets backed by primary gold/ silver like units of exchange-traded funds (ETFs) or units of mutual funds,” the draft framework, issued on Wednesday, clarified.
The proposed guidelines reiterate these restrictions and introduce several critical reforms, Shetty noted.
Sumit Sharma, Founder, Radian Finserv, said, “The RBI’s draft circular provides uniformity in gold lending practices. The proposed restrictions on accepting gold in its primary form — such as gold bars — and financial instruments like gold ETFs or mutual funds as collateral mark a significant shift towards reducing systemic risks. We view this as an opportunity to recalibrate our lending framework in line with evolving regulatory expectations.”
RBI draft regulations: Other restrictions and ceilings for gold loans
Used collateral should not be used concurrently for extending loans for income generating purposes as well as consumption loans, the draft framework proposed. Lenders can also not extend loans where ownership of the collateral is doubtful, as per draft norms.
“Banks and entities must keep a record of the verification of the ownership of the collateral. In case the original receipts of purchase of gold collateral are not available, a suitable document/declaration obtained from borrower shall be prepared explaining how the ownership of the collateral has been determined. Pledge of gold collateral shall be subject to suspicious transaction reporting policy of the lender under relevant regulatory directions,” the draft guidelines said.
Shetty sees these measures as part of government efforts to curb misuse, improve asset quality, and reduce risk in gold-backed lending.
Gold loans in Indian are still offered by unregulated players, leading to usurious practices and loss of the pledged collateral, according to him. “Formalising lending practices will enable regulated financial entities to innovate and be more agile, reaching a wider customer base and helping them access credit safely.”
How much gold can you pledge?
You can pledge jewelry and coins up to 1 kg, but only up to 50 grams of them can be coins—that too only if they have been sold by the bank and are of 22 carat or more purity.
Also read: Gold Loan: How much can you borrow and what affects the loan amount?
Limit for personal loan
If you are taking a gold loan for personal use as a bullet repayment (lump sum payment), then its maximum period cannot exceed 12 months.
Limit for small banks
Co-operative banks and RRBs will not be allowed to give a gold loan of more than Rs 5 lakh to an individual.
If you are thinking of taking a gold loan, then you must know these things:
Your repayment capacity will be evaluated before giving the loan. Now loans will not be passed without thinking. Emphasis will be given on your income and repayment capacity.
Loan renewal or top-up will happen only when the old loan is in the standard category and is within the LTV limit. This will save you from getting trapped in unnecessary debt.
The purity and value of gold will be assessed through a clear and uniform process. That is, you will get transparency in determining the value of your jewelry.
You will not be able to take different gold loans simultaneously. That is, if you have taken a loan for personal expenses, then you will not be able to take another for business expenses. RBI wants to make monitoring easier with this.
The utility of the loan will be monitored. Lenders will check that the loan is being used for the same purpose for which you took the loan.
RBI has issued draft regulations but what will happen next?
The RBI has currently sought suggestions from the public and all stakeholders on this draft. The final rules will be issued after reviewing the suggestions.
