New Gold Loan Rules on Cards: RBI Proposes Stricter Norms, Including Monitoring Use of Funds

Introduction

On April 9, 2025, the Reserve Bank of India (RBI) released a draft framework aimed at bringing uniformity and enhanced regulatory oversight to gold-backed lending practices across all regulated entities in India. The comprehensive guidelines propose stricter norms for lenders offering loans against gold collateral, including measures to monitor the end-use of funds, introduce borrower protections, and address operational gaps identified during recent supervisory checks. These regulations come in response to a significant 30% growth in gold loans between September and February, which substantially outpaced overall loan growth Economic Times.

Background and Context

The draft directions are intended to replace more than 30 circulars and notifications issued over the past six decades, streamlining and modernizing the regulatory framework for lending against gold Moneylife. RBI Governor Sanjay Malhotra clarified that the proposed guidelines are not meant to tighten gold loan availability but rather to rationalize the process, primarily addressing conduct-related aspects of gold loan operations Business Today.

The RBI’s move comes after identifying several irregularities in the gold loan sector during recent supervisory checks. These included inadequate borrower due diligence, lack of end-use monitoring, weak tracking of loan-to-value ratios, and incorrect application of risk weights NDTV Profit.

Key Provisions of the Proposed Regulations

1. Loan-to-Value (LTV) Ratio and Collateral Requirements

• A universal cap of 75% on the loan-to-value (LTV) ratio for all gold loans, regardless of purpose NDTV Profit.
• For bullet repayment loans, the LTV is calculated on the total amount repayable at maturity, not the initial loan amount.
• Lenders must maintain the LTV ratio continuously throughout the loan tenure.
• Breach of the LTV ratio for over 30 consecutive days triggers an additional standard asset provisioning of 1%.
• No loan renewal is permitted if the LTV ratio remains breached on the maturity date.
• Loans will be provided only against unencumbered gold jewelry or coins with verified ownership.
• Loans against primary gold (bullion, bars) or gold-backed financial instruments (ETFs, mutual funds) are not permitted Moneylife.
• A maximum limit of 1kg of gold ornaments and 50 grams of gold coins per borrower is imposed.

2. Monitoring End-Use of Funds

• Lenders must implement proper systems and controls to periodically monitor the end-use of funds disbursed under gold loans Economic Times.
• Comprehensive documentation of how borrowers utilize the funds must be maintained.
• For income-generating loans, documentary evidence of end-use becomes mandatory NDTV Profit.

3. Loan Classification and Purpose Separation

• Gold loans for income-generating purposes must be classified based on their intended purpose rather than as generic gold loans.
• The quantum and tenor of income-generating loans should be determined by the underlying activity, not just the collateral value.
• Borrowers cannot simultaneously maintain gold loans for personal expenses and business use Business Today.

4. Gold Valuation and Assessment

• Valuation must be based on 22-carat purity, using the lower of a 30-day average price or the previous day’s closing price Moneylife.
• Professional assaying is required before loan disbursement, with clear deductions for non-gold elements.
• Lenders must implement a standardized procedure across all branches for assessing the weight and purity of the gold collateral Economic Times.

5. Loan Renewals and Extensions

• Loans can be renewed or topped up only if the existing loan is classified as a standard asset and the LTV ratio has sufficient headroom Reuters.
• A single gold collateral cannot be used for multiple loans simultaneously.
• Loans cannot be issued if the collateral has been re-pledged or if ownership is uncertain.

6. Borrower Protection Measures

• Transparency enhancements through Key Fact Statements (KFS) and Annual Percentage Rate (APR) disclosures Fortune India.
• Lenders must return pledged gold within seven working days of full loan repayment.
• A penalty of Rs. 5,000 per day applies for delays in returning gold, unless the borrower is untraceable Upstox.
• After auctioning gold in default cases, lenders must provide a detailed statement to the borrower and refund any surplus within seven working days.
• Reserve price for auctions cannot be lower than 90% of the market value of the gold.
• If gold is damaged or lost in the lender’s custody, the lender must bear repair costs or compensate the borrower.
• Loan documents must clearly detail collateral particulars and auction terms in default cases.
• All communications must be in the borrower’s preferred or regional language.

7. Storage and Security Requirements

• Gold storage is mandated only in branches with certified vault facilities under strict internal controls.
• Borrowers must consent to surprise verification checks through a clause in the loan agreement.
• Periodic review of unclaimed gold is required after a two-year period.

Timeline and Implementation

The RBI has invited comments and feedback from stakeholders and the public on the draft guidelines, with the consultation window open until May 12, 2025 Business Standard. No specific timeline for implementation has been announced beyond this consultation period.

Market Impact and Reactions

The announcement of the RBI’s plans for comprehensive guidelines on gold loans initially led to a drop in shares of gold-focused non-banking financial companies (NBFCs). Muthoot Finance, a major gold loan provider, saw its shares fall by nearly 6% Groww. However, RBI Governor Sanjay Malhotra’s clarification that the guidelines aim to rationalize rather than tighten gold loan regulations helped ease investor concerns CNBC TV18.

Implications for Borrowers

Positive Aspects

1. Enhanced Transparency: Clearer loan terms with specific details on collateral, interest rates, and repayment conditions make it easier for borrowers to understand their obligations Business Today.
2. Borrower-Friendly Measures: The requirement for lenders to return gold promptly after loan repayment, with penalties for delays, protects borrowers from unnecessary delays in recovering their collateral Upstox.
3. Fair Valuation: Standardized procedures for assessing gold quality and value ensure borrowers receive fair treatment across all lending institutions.
4. Protection Against Exploitation: Limits on the maximum gold that can be pledged (1kg ornaments, 50g coins) and clear auction procedures with a minimum reserve price help prevent exploitation.

Potential Challenges

1. Stricter Eligibility: More thorough assessment of repayment capacity may make it harder for some borrowers to qualify for gold loans.
2. Restricted Flexibility: Prohibition on using the same gold for multiple loans and limitations on loan renewals or top-ups could reduce borrowing flexibility.
3. Increased Documentation: Requirements for end-use monitoring and documentation may increase the paperwork burden for borrowers.

Implications for Lenders

1. Operational Adjustments: Lenders will need to implement standardized procedures for gold assessment, storage, and monitoring, potentially requiring operational changes.
2. Enhanced Compliance Requirements: Requirements for documentation, end-use monitoring, and maintaining the LTV ratio may increase compliance costs.
3. Risk Management: The unified framework helps lenders better manage risks associated with gold loans through standardized processes and clearer guidelines.
4. Portfolio Limitations: The introduction of single-borrower limits and sectoral caps on gold loan portfolios may restrict growth potential for some lenders heavily focused on gold loans.

Conclusion

The RBI’s draft directions on lending against gold collateral represent a significant step toward establishing a harmonized regulatory framework across all lending institutions. By addressing operational gaps, enhancing borrower protection measures, and implementing stricter monitoring requirements, the guidelines aim to make gold loans safer, more transparent, and fair for all parties involved.

While the regulations may impose additional compliance requirements on lenders and potentially restrict some borrowing flexibility, they ultimately strengthen the gold loan ecosystem by ensuring responsible lending practices and protecting borrowers from potential exploitation. As the consultation period continues until May 12, 2025, stakeholders have the opportunity to provide feedback that may further refine these guidelines before they are finalized and implemented.