RBI Drafts Gold Loan Norms to Standardize Lending Rules

Introduction

The Reserve Bank of India (RBI) has released comprehensive draft guidelines to regulate the fast-growing gold loan sector. The proposed regulations, issued under the RBI (Lending Against Gold Collateral) Directions, 2025, seek to harmonize disparate norms across regulated entities and introduce a consistent, borrower-centric, and risk-sensitive framework. These norms mark a pivotal shift in India’s gold loan regulatory architecture, consolidating prudential safeguards, enhancing transparency, and addressing systemic vulnerabilities.

This article delves into the key features of the draft directions, the regulatory rationale, implications for banks and NBFCs, and expected changes in the compliance and legal landscape. The article is especially relevant for stakeholders engaged in financial services, compliance advisory, consumer finance, and regulatory litigation.

Background and Regulatory Objectives

Gold loans represent a significant portion of short-term credit in India. Historically, lending against gold has been governed by various circulars and sector-specific guidelines. However, the absence of a unified code created inconsistencies in risk practices, collateral handling, documentation, and borrower rights.

The RBI’s draft seeks to consolidate and harmonize gold loan regulations across all regulated entities (REs), including:

• Commercial banks
  
• Small finance banks
  
• Regional rural banks (RRBs)
  
• Urban and rural co-operative banks
  
• Non-Banking Financial Companies (NBFCs)
  
• Housing Finance Companies (HFCs)
  

The primary objectives of the draft guidelines are:

1. To unify gold loan regulations across all REs.
   
2. To eliminate gaps in prudential lending norms.
   
3. To standardize borrower protection mechanisms.
   
4. To increase operational transparency.
   
5. To mitigate risks associated with overexposure to gold-backed credit.
   

Scope and Applicability

The draft directions apply to all loans where eligible gold collateral—defined as gold jewellery, ornaments, and specified gold coins—is the sole security provided. These include loans for both consumption and income-generating purposes, including farm and business credit. The directions also cover loans backed by silver ornaments and coins where permitted.

Excluded from the scope are advances against primary gold such as bullion, bars, and financial instruments like ETFs and mutual funds. The guidelines expressly prohibit re-pledging or lending against gold where ownership is in doubt.

Key Regulatory Highlights

1. Classification of Gold Loans

The RBI introduces two distinct classifications:

• Consumption Loans: Used for personal expenses, emergencies, or durables, with no direct income generation.
  
• Income-Generating Loans: Linked to productive activities such as agriculture, trade, or acquisition of business assets.
  

The classification determines permissible tenures, LTV ratios, and monitoring requirements. The same gold collateral cannot be used for both purposes simultaneously.

2. Loan-to-Value (LTV) Norms

A critical pillar of gold loan regulation is the LTV ratio—the percentage of the gold’s value that can be lent to a borrower. The guidelines stipulate:

• A uniform maximum LTV of 75% for consumption gold loans.
  
• NBFCs must adhere to the 75% LTV cap for all gold loans.
  
• For bullet repayment loans, the LTV is calculated based on total repayment due, not just the principal.
  

Persistent breaches of LTV beyond 30 days will attract additional provisioning requirements.

3. Tenure and Quantum Restrictions

• Bullet repayment loans (where principal and interest are repaid at maturity) are capped at 12 months for banks.
  
• Co-operative banks and RRBs cannot extend bullet gold loans exceeding ₹5 lakh per borrower.
  
• Aggregate collateral limits:
  
  • Gold: Up to 1 kg per borrower
    
  • Specified gold coins: 50 grams per borrower
    
  • Silver coins: 500 grams per borrower
    

These thresholds apply across all accounts in which a borrower has an interest.

Standardisation of Assaying and Valuation Practices

The draft mandates uniform procedures for gold assaying and valuation, to be followed across all branches of a lender. Key provisions include:

• Presence of the borrower is compulsory during assaying.
  
• Stone weights, fastenings, and non-gold components must be clearly deducted and disclosed.
  
• Valuation must be based on 22-carat gold prices, either from the India Bullion and Jewellers Association or SEBI-recognized exchanges.
  
• Only intrinsic gold value is considered; gems or attachments are excluded.
  

Lenders are also required to publish their valuation policies and methods on their official websites for borrower awareness.

Collateral Handling and Security

Ensuring the safety and integrity of gold collateral is a central theme in the draft. Lenders must:

• Store gold only in branches equipped with secure vaults.
  
• Prohibit outsourcing storage and limit gold transport only to essential cases.
  
• Conduct surprise internal audits and periodic training.
  
• Ensure full transparency during release or return of collateral.
  

Gold must be returned within seven working days of loan settlement. Delays will attract ₹5,000 per day as compensation.

Documentation and Disclosures

Lenders must issue a detailed collateral certificate (or e-certificate) including:

• Gross and net gold weight
  
• Purity (in carats)
  
• Valuation method
  
• Deductions for non-gold content
  
• Image and condition of the jewellery
  

Loan agreements must clearly describe:

• Security and its value
  
• Auction procedures and notice periods
  
• Rights of the borrower
  
• Refund or surplus terms post-auction
  

Communication must be in the borrower’s preferred language. For illiterate borrowers, key terms must be explained in the presence of a witness.

Transparent Auction Processes

The RBI aims to prevent misuse and exploitation in gold auctions. Guidelines stipulate:

• Public auction announcements in at least one regional and one national newspaper.
  
• One-month notice to borrowers or legal heirs prior to auction.
  
• Reserve price must be 90% or more of current gold market value.
  
• Only approved auctioneers may conduct the sale.
  
• Lenders and valuers are prohibited from participating in auctions to avoid conflict of interest.
  

After auction, any surplus must be refunded within seven working days. Shortfalls may be recovered as per the loan agreement.

Compensation and Redressal

To enhance borrower trust, the RBI introduces compensation clauses:

• Damage to collateral: Lenders must bear repair costs.
  
• Loss of collateral: Immediate disclosure and full compensation as per policy.
  
• Delay in release: ₹5,000/day payable to borrowers post loan settlement.
  

These rights are in addition to any remedies available under consumer protection or civil law.

Systemic Controls and Monitoring

• Gold loans must be included in risk management and credit policy frameworks.
  
• Lenders must set exposure caps both on gold loan portfolios and individual borrowers.
  
• End-use monitoring is mandatory, with documentation required for income-generating loans.
  
• Top-up and renewal loans must follow fresh appraisal and cannot violate LTV norms.
  
• Multiple loans to one borrower must be tracked to avoid misuse and fraud.
  

Disclosures and Regulatory Reporting

Under Section J of the draft, lenders must:

• Disclose gold loan exposure as a percentage of total assets.
  
• File periodic reports on gold auctions, unclaimed collateral, and recovery efficiency.
  
• Treat unclaimed gold collateral (post 2 years of repayment) as a special category, triggering outreach campaigns.
  

Implications for Stakeholders

For Banks and NBFCs

• Operational Readiness: Institutions will need to train personnel, standardize documents, and update IT systems.
  
• Compliance Burden: Higher compliance costs due to audit, reporting, and storage requirements.
  
• Risk Management: Lenders must recalibrate LTV thresholds, conduct better due diligence, and improve collateral security.
  

For Borrowers

• Transparency and Protection: Borrowers benefit from clear documentation, compensation clauses, and complaint redressal.
  
• Improved Loan Terms: Standardization may reduce valuation disputes and improve trust in formal lending.
  
• Reduced Misuse Risk: Restrictions on concurrent use of collateral and ownership verification prevent borrower exploitation.
  

For Legal and Compliance Professionals

• Policy Review and Advisory: Legal teams must assist lenders in revising internal policies, loan contracts, and training modules.
  
• Dispute Resolution: Potential disputes around auction, valuation, or delay in release will need structured legal protocols.
  
• Litigation Avoidance: Strong borrower documentation and adherence to RBI norms will lower litigation risk.
  

Conclusion

The RBI’s draft gold loan regulations signal a move towards principle-based, borrower-friendly, and risk-aware lending practices. By standardizing assaying, documentation, and auction processes, the central bank seeks to formalize and stabilize a historically informal sector.

Lenders must now proactively evaluate the draft guidelines, assess internal gaps, and build a robust compliance roadmap. Law firms and financial advisors play a critical role in guiding institutions through this regulatory transition, ensuring legal soundness and strategic alignment with RBI’s evolving gold loan regime.

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