Balancing between Bling & Business: RBI proposes new Gold Lending rules

– Team Finserv | finserv@vinodkothari.com

Genesis of the change

The RBI on September 30, 2024, flagged several concerns in gold lending practices of financial entities. Further, there were separate guidelines for banks and NBFCs leading to regulatory arbitrage and operational ambiguity. On April 09, 2025, the RBI introduced the Reserve Bank of India (Lending Against Gold Collateral) Directions, 2025 (Draft Directions).

 The Draft Directions intend to:

1. Harmonise guidelines w.r.t. gold lending across all REs.
2. Address previous observations raised by RBI in lending practices and plug any loopholes.

In this write-up, we highlight the major changes for lenders, and particularly for NBFCs (The same are subsequently elaborated in the article).

Snapshot of Major Changes for NBFCs
Aspect	Key-Change
Uniform Applicability	Uniform regulations have been prescribed for all lenders undertaking lending against gold and silver
Regulated collateral	Eligible gold collateral to additionally include specified gold coins, along with gold-jewelleryDirections to mutatis mutandis, apply to loans against silver ornaments, jewellery and coins
Credit-assessment of borrowers	Lenders to take into account repayment capacity of the borrower in all cases, and not lend purely on the strength of the gold collateralFor income generating loans, credit underwriting should take into account cash-flows to be generated through economic activity
Monitoring of end-use	End use of income generating loans to be monitored in all cases. Documentary evidence: Mandatory for income generating loans,For consumption loans, threshold to be decided by the lender, above which document verification to be mandatory
Topup loans and renewal	Top-up loans as well as renewals not allowed for NPA borrowers
Sectoral, borrower and collateral limits	Internal limits to be set for sectoral and single borrower exposure RBI prescribed limits for exposure on amount of gold accepted as collateral from a borrower
Maintenance of LTV at all times	LTV to be maintained throughout loan journeyBreach would warrant additional provisioning
Gold collateral management	Same gold to not be pledged for different purpose loansVerification of ownership of gold mandatory- Lenders to not extend loans where the ownership is doubtful, Lending against re-pledged gold prohibited
Fair lending practices	Additional fair lending practices introduced in response to RBI concerns  Prescribed information to be part of loan documentation Streamlining of auction procedure Valuation of collateral to be done by the lender employee and in presence of borrower (at time of loan sanction)

Applicability

1. Commercial Banks (including SFBs, Local Area Banks & Regional Rural Banks, excluding Payments Banks);
2. Primary (Urban) Co-operative Banks (UCBs) & Rural Co-operative Banks (RCBs), i.e., State Co-operative Banks (SCBs) and Central Co-operative Banks (CCBs).
3. NBFCs, including HFCs

Type of Loans

The Directions seemingly apply to such loans which are exclusively secured by ‘Eligible Gold Collateral’ and where the end use is for:

• Consumption – This includes loans extended to individuals for personal consumption such as meeting emergency requirements, medical needs, purchase of consumer durables etc., which do not directly generate any income for the individual.
  • Further, any loan that is not an income generating loan shall be treated as “consumption loan”.
• Income generation – Loans extended for the purposes of productive economic activities, such as farm-credit, loans for business/commercial purposes, loans for creation/acquisition of productive assets, etc (Para 7(viii)).
  • It is important to note that gold loans extended for undertaking agricultural activities may even be classified as PSL in case the end use is continuously monitored and confirmed. Refer RBI FAQs on PSL Guidelines.

Would that mean that loans which are secured with any additional collateral in any other form, would not be covered? This does not appear to be the intent of the Directions, and as such, all loans secured by gold, either exclusively or otherwise, should be in adherence to these Directions. Additionally, the Directions is intended to apply mutatis mutandis to loans secured by silver jewellery, silver ornaments and specified silver coins.

There does not seem to be any major differential treatment of loans based on the end use categorisation, except the requirement of end-use monitoring (refer to Para 12 of the Directions, and our comments on the same below). Further, the Directions mention that income-generating loans will not generally be categorised as gold loans. However, such non-categorisation, does not seem to alter the applicability of compliances on gold loans under these directions, specifically the LTV requirement and is only for the purpose of internal classification in the LMS of the lender.

It may be noted that such distinction based on end-use may potentially facilitate PSL classification for gold loans extended by NBFCs. As discussed above, the RBI PSL FAQs clarified that gold loans extended by banks may be considered as PSL, where the end-use is for agricultural purposes and such end-use is continuously monitored. However, investment in securitisation notes backed by gold loans or acquisition of gold loans that were originated by NBFCs are expressly prohibited from PSL classification for banks. Now, with the regulatory framework being harmonised across all lender categories, NBFCs are also subject to similar obligations as banks, including the mandatory monitoring of end-use. Given this alignment, there does not seem to be any reason for continuing the existing regulatory distinction between gold loans originated by banks and NBFCs.

Accordingly, the blanket prohibition on PSL classification for bank exposures to gold loans originated by NBFCs — particularly where the loans are income-generating and for agricultural purposes (farm credit) may merit a fresh review by the RBI.

Eligible Collateral

• Under the extant regulatory framework, eligible collateral for gold-lending purposes expressly excluded bullion, primary gold, and gold coins. Only gold-jewellery was considered to be eligible collateral.
• However, under the Draft Directions, the ambit of eligible collateral has been expanded to include “gold-jewellery, gold ornaments, and specified gold-coins”.
  • Restriction on primary gold/ silver or financial assets backed by primary gold/ silver like units of ETFs Mutual Fund units still continues
• Presently there are no specific guidelines covering lending against silver. The Draft Directions are intending to also cover lending against silver jewellery, silver ornaments and specified silver coins as well.

Prudential Requirements

A.     Limits

• Under the extant regime – lenders are required to set sectoral limits for sensitive sectors , where real estate and capital markets are deemed to be sensitive. However, given the volatile nature of gold it has also been suggested to include sectoral limits for gold loans.
  • Policy to specify ceiling on loans secured by gold, single borrower limit etc.
• However, what if an NBFC is exclusively into gold lending where the entire, or majority of its business is of gold lending; would such entities be required to have a sectoral cap. The answer may be negative, however, such entities may set other limits such as borrower limits, refinancing limits etc.
• Limits based on the quantity of gold/ silver ornaments and coins per borrower have also been specified.

B.     Monitoring of end-use

RBI had raised concerns that end-use is not usually monitored by gold lenders. Usually where gold loans are extended for personal use or consumption it may not be possible for monitoring the end-use.

• While in all cases end-use is required to be monitored, and evidence is to be put in record, the Draft Directions also segregate the same into two categories based on their purpose i.e. income generating v. consumption loans.
  • Income generating loans: In case of income generating loans, documentary evidence of end-use shall be mandatorily used for monitoring end-use in all cases.
  • Consumption loans: In case of consumption loans, as it may be difficult for undertaking end-use monitoring for each loan, the draft Directions require to set thresholds above which end-use monitoring would have to be undertaken.

C.     Credit Appraisal of borrowers:

• The Draft Directions require that the amount sanctioned must have a linkage to the borrower’s repayment capacity (see Para 11). The implication here is that the lending cannot be purely on the strength of the collateral, and there must be proper underwriting even for secured loans.
• Usually in case of secured loans, loans were extended usually based on the strength of the collateral with limited emphasis on the borrower’s repayment ability. Since in case of gold loans, the gold is usually pledged and the custody of the gold remains with the lender and the LTV is required to be maintained throughout the loan journey, the lender’s interest is protected throughout. In case the borrower defaults, the lender is well within its right to sell off the gold and recover loan proceeds. However, such requirement for mandatory credit assessment highlights that even in secured lending, extending loans without assessing the borrower’s repayment ability would be irresponsible lending. The intent is clear that security alone cannot substitute sound credit evaluation. Therefore, irrespective of the strength of the collateral, lenders must duly assess the creditworthiness and repayment capacity of the borrower before disbursing secured (gold) loans.

D.     Restrictions on top-ups:

• The RBI observed that top-up loans were being granted without any fresh appraisal and at times, were being used as a device to facilitate evergreening for delinquent borrowers. The Draft Directions now disallow any top-up loans to NPA borrowers, and loan renewals and top-up loans can be sanctioned only if if the existing facility of the borrower is classified as standard and only after a fresh credit appraisal is undertaken
• Further, top-up loans should not breach the overall LTV limits.
• In case of bullet repayment loans, borrowers shall have to clear any accrued interest to be eligible for any loan renewal or top-up loan.

Restrictions on Gold as Collateral

• Same gold, different purpose: The Draft Directions explicitly prohibit concurrent use of the same gold collateral for both income-generating and consumption loans, regardless of the value of the collateral or the LTV maintained.
  • This implies that even if the overall LTV remains within prescribed limits, the same gold asset cannot be pledged simultaneously for loans serving different end-use purposes.
  • Would this mean that multiple loans may be extended against the same gold if all such loans are for the same end-use?
  • The underlying rationale for this restriction is not entirely clear.
• Verification of ownership: Lenders are required to verify and record ownership of gold collateral and loans should not be extended where ownership is doubtful.
• Repledging of loans: Lenders would not be eligible for lending against repledged gold. While the exact rationale may not be clear, however, it may mean that any lender/ individual (read money lender) with whom any gold has been pledged, will not be permitted to repledge such gold for availing credit facility.

Additional Requirements in case of Bullet Repayment Loans:

• Consumption loans with bullet repayment of both principal and interest shall be maximum 12 months.
  • Not applicable in case of income generating loans or loans with EMI payments.
• Bullet repayment loans by cooperative banks and RRBs shall be subject to a maximum ceiling of Rs 5 lakh per borrower.

LTV Requirement:

• It was observed by RBI that LTV was not periodically monitored by lenders and breaches were not addressed.
  • While for banks, the requirement to maintain LTV was specifically required throughout the loan tenure taking into account the loan outstanding including accrued interest, however, in case of NBFCs, there was no such explicit requirement. As a result, NBFCs were computing and ensuring LTV only at the time of sanction, based on the value of loan sanctioned (principal amount).
• Now, LTV of minimum 75% to be ensured by lenders, on an ongoing basis, throughout the loan tenor.
  • Uniform for all lenders
  • The Directions, however, seem to introduce some ambiguity. Proviso 1 specifically requires a minimum 75% LTV in case of consumption loans, while proviso 2 mentions a 75% LTV for all gold loans irrespective of the purpose of the loan.
  • If Proviso 2 applies to all gold loans, then the specific mention of consumption loans in Proviso 1 becomes redundant. This overlap creates uncertainty as to whether LTV requirement applies exclusively to consumption loans, or to all gold loans
  • In general, LTV ratio is determined based on the nature and risk of the underlying collateral, rather than the end use of the loan proceeds. In our view, the LTV requirement should apply to all gold loans, regardless of the purpose for which the funds are used.
• In case of any breach in the LTV for more than 30 consecutive days, the entire outstanding amount shall attract an additional standard asset provisioning of 1%. Such additional provisioning shall be reversed after LTV is met and remains met for 30 days.
  • No renewal if LTV is in breach at maturity.

Policy Requirement

The Draft Directions prescribe that the norms for lending against gold collateral shall be included in the credit risk management policy (‘Policy’), and shall include the following aspects:

1. Appropriate single borrower limits
2. Sector limits for the portfolio
3. Methods to ensure-end use (please refer to our comments above)
4. LTV value
5. Valuation standards and norms

Fair-lending Practices & Documentation Requirements

The Draft Directions also introduce several fair lending requirements such as:

• Standardization of procedures and documentation across all branches of the lenders
• Details to be displaced on the website and/ or branches
  • Procedures framed, methodology for determination of net weight and price of the gold and for determination of LTV ratio.
• Qualified assayer(s)/ valuer(s) to be appointed who do not have any negative records in the past, for valuation of the gold collateral.
• Presence of the borrower necessary while assaying the collateral at the time of loan sanction; Procedure to be explained.
  • This was also pointed out by RBI
• Loan agreement shall capture description of gold collateral taken as security, including:
  • Value of the collateral
  • Details of the auction procedure
  • Notice period which shall be allowed to the borrower for repayment/settlement of loan,
  • Refund of surplus if any, from the auction of the gold collateral
  • Any other necessary details in this regard
• Communications with the borrower, particularly critical communications (such as the terms of the loan, or other things that affect their interest) shall be in the borrower’s regional language / language of their choice.

Conclusion:

While all that glitters may be gold, it definitely will be subjected to enhanced regulatory guidelines. These Directions signal the RBI’s approach and intent to tighten regulatory scrutiny and take timely action wherever lending practices deviate from the regulator’s expectation. Though many of these measures are in response to concerns the RBI had previously flagged, it now makes it imperative for lenders to introspect their practices, remembering that RBI is always watching!

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Other resources:

1. Surging gold loan business sets off RBI alarm
2. Choppy landing for soft lending: Regulatory concerns on quality of lending
3. FAQs on Regulatory measures towards consumer credit and bank credit to NBFC