CURRENT AFFAIRS
CURRENT AFFAIRS
Description
On April 9, 2025, the Reserve Bank of India (RBI) unveiled draft guidelines aimed at regulating loans secured against gold. These proposed norms are intended to align lending practices across banks and Non-Banking Financial Companies (NBFCs), amidst concerns over inconsistent policies and a significant surge in gold-backed lending. While the move aims to ensure transparency, borrower protection, and regulatory parity, it has raised concerns regarding its potential impact on rural borrowers who heavily depend on gold loans for agricultural and personal needs.
The RBI's proposed framework has ignited widespread discussions, particularly in states like Tamil Nadu. Chief Minister M.K. Stalin formally requested the Union Finance Ministry to reconsider the regulations, expressing concern over disruptions to rural credit availability. In response, the Finance Ministry clarified that the new rules will be enforced from January 1, 2026, allowing time for stakeholder adaptation. The ministry also reaffirmed its commitment to safeguarding the interests of small and vulnerable borrowers.
Background And Rationale
Exponential Growth in Gold Loans: During FY24, gold loan portfolios of banks grew by a staggering 104% year-on-year, while combined growth across banks and NBFCs exceeded 50%.
Regulatory Gaps: This spike has prompted concerns about inconsistent valuation norms, aggressive lending, and over-leveraging by borrowers.
Rising Gold Prices: As the price of gold continues to climb, more individuals have turned to gold as a primary form of collateral, widening the credit net, especially in informal sectors.
Goal of the Guidelines: To introduce uniform standards in lending, enhance borrower protection, and ensure risk management without stifling access to credit.
Highlights Of Draft Guidelines
Loan-to-Value (LTV) Norms:
The maximum LTV ratio remains capped at 75%.
For bullet repayment loans, accrued interest must now be factored into the LTV calculation, potentially lowering the upfront loan amount.
Proof of Ownership:
Borrowers will be required to furnish documents proving ownership of the gold being pledged, curbing fraud and impersonation.
Gold Valuation Standards:
A uniform valuation method based on 22-carat gold prices will be mandatory.
Standardised checks for purity and weight will apply to all lenders to maintain consistency.
Loan Purpose Restrictions:
Combining loans for personal consumption with those for income-generating activities will no longer be allowed.
Top-Up and Renewal Norms:
Fresh loans or top-ups can only be granted if the existing loan is performing and within LTV limits.
Full repayment will be required before sanctioning any new loan on the same collateral.
Penalty for Delays:
If a lender delays returning the gold beyond seven days after full repayment, they must compensate the borrower at Rupees 5,000 per day.
Prohibition on Re-Pledging:
NBFCs will be barred from using pledged gold as collateral to raise funds themselves.
Challenges And Concerns
Impact on Rural Borrowers
Gold loans are often the only accessible form of credit for small farmers, marginal traders, and the informal workforce.
Stricter LTV norms and documentation could reduce credit access in rural areas.
Compliance Burden on Smaller NBFCs
Enhanced documentation and valuation protocols may be cost-intensive, pushing smaller NBFCs towards mergers or closures.
The Debt Service Coverage Ratio (DSCR) requirements and operational upgrades may lead to higher borrowing costs.
Likely Rise in Lending Rates
As operational and compliance costs rise, lenders may pass on the burden to customers through higher interest rates.
Projected Outcomes For Borrowers
Lower Loan Eligibility: Borrowers may get less cash for the same quantity of gold.
Liquidity Pressure: Stricter norms could constrain immediate credit access, especially in emergencies.
Reduced Collateral Flexibility: Proof-of-ownership requirement may exclude some borrowers.
Higher Transparency and Protection: Standardisation may reduce fraud, malpractice, and pricing disparities.
Regulatory Outlook: Balancing Credit Growth With Safety
While the new rules may slow the growth of gold loan portfolios particularly among NBFCs the RBI is reportedly open to introducing differentiated norms for small-ticket loans. This approach would balance financial inclusion with the need for systemic risk management.
As India’s dependence on gold-backed credit rises, especially in times of economic stress, these guidelines aim to ensure a more transparent, fair, and resilient lending system, aligning short-term flexibility with long-term financial health.
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