A pledge of prudence – New Gold Lending Directions keep it balanced, non-discriminatory and flexible

Team Finserv | finerv@vinodkothari.com

Executive Summary of Changes:

I. Background

On June 06, 2025, the RBI notified the final Reserve Bank of India (Lending Against Gold and Silver Collateral) Directions, 2025 (‘Gold Lending Directions’), after incorporating substantial changes from the Draft Directions published on April 09, 2025 . In the final version, the RBI appears to have accepted some of the recommendations of the Ministry of Finance as also several of the recommendations from stakeholders and other commentators [VKC also sent some recommendations, partly accepted].

In this resource, we analyse the Gold Lending Directions, while also comparing the final version with the original draft. 

II. Applicability

As stipulated under the Draft Directions, the Gold Lending Directions aim to create a harmonized and unified regulatory framework for Regulated Entities (REs) in gold-lending, and are applicable to:

• Commercial Banks (including SFBs, Local Area Banks and Regional Rural Banks, but excluding Payments Banks).
• Primary (Urban) Co-operative Banks (UCBs) & Rural Co-operative Banks (RCBs), i.e., State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs), and
• All NBFCs, including HFCs

There has been no change from the Draft Directions with regard to applicability. In fact, remarkably, there was a discrimination in the Draft Directions seeming to put NBFCs to a disadvantage (the LTV cap was not applicable to banks in case of income generating loans, though applicable to NBFCs); the same has now been removed..

Applicability Date:

Above entities should apply the directions as expeditiously as possible, but no later than April 1, 2026.  Further, the Directions refer to “adoption” by the RE – which implies that REs are expected to act soonest towards “adopting”. Loans extended before such adoption are covered by the erstwhile rules. This essentially implies that there is no disruption of business and the transitioning is smooth.

Does it have to be an all-at-a-time transitioning, or can lenders transition in tranches? There may be many changes required: besides LTV flexibility, there are rules on valuations, safe-keeping, auctioning, documentation, etc. Our view is that as regards changes in policy, SOPs, documentation, etc., the same may be initiated in tranches, but on key business aspects such as LTV, top-up lending, etc.,  the shift should be done only when the RE is fully ready to transition.

Given the surging gold prices  and LTV and top-up flexibility, we also expect that many REs may be tempted to transition before the deadline.

III. Type of Loans

The Gold Lending Directions apply to “income generating loans” and “consumption loans” where eligible gold collateral or silver collateral is accepted as a collateral security. Some definitions are of relevance here, namely:

• Collateral security: “Collateral Security” or “Collateral” means an existing asset of the borrower pledged to the lender for availing and securing a credit facility extended by the lender to the borrower”
• Income generating loans: Loans extended for the purpose of productive economic activities. Here, of course, the lending – including the size of the loan, tenure, repayment pattern, etc are all defined by the cashflows of the income source for which the loan will be utilised.
• Consumption loans: A loan that does not fit under the definition of an income generating loans.
• Eligible gold-collateral: Collateral of jewellery, ornaments, or coins made of gold or silver.

Hence, all lending against gold collateral would be either categorised as an income generating loan, and if not, as a consumption loan, and consequently, be regulated under these Directions.

If there is an “eligible collateral”, then the question that arises is what is the “ineligible collateral”? Consistent with the Draft Directions, the Gold Lending Directions clarify that: Lenders shall not lend against,

• Primary gold or silver; or
• Financial assets,  backed by such primary gold/silver (e.g. units of exchange traded funds, or mutual funds), or gold bonds.

Changes against the Draft Directions: The following changes have been made against the Draft Directions in this regard:

Aspect	Change from Draft Directions
“Collateral Security”	Draft Directions: Defined the collateral security in relation to primary security (i.e. assets created out of the credit facility). Going by this definition – In situations where there were no assets created out of the credit facility, there would be no “collateral security” Further, the Draft Directions specified ambit for regulation as “where eligible gold is the only collateral available”. This created ambiguity/exclusion in case of mixed collateral (e.g. lending partly against gold, and partly against other assets).   Final Directions: Both the issues are now resolved.
“Consumption Loans”	Draft Directions: Consumption loans were defined as: (a) Loans given for certain specific purposes – such as medical needs, consumer durables, emergency requirements, which do not directly help in generating income; and/or,  (b) any loan that is not an IG loan.   Final Directions: The definition has been simplified to mean any loan which is not an income generating loan.

IV. Differentiation between ‘Income Generating’ loans, and ‘Consumption’ loans:

Formerly, under the Draft Directions, there was a significant differentiation between the applicable compliance requirements for Income Generating loans (IG Loan) and Consumption loans.  A tabulated snapshot of the compliance under the Draft Directions, may be accessed here.

However, under the present Gold Lending Directions, the differentiation has been reduced. Whilst the Draft Directions prescribed more stringent requirements with respect to monitoring end use, concurrent lending, purpose based internal classification and mandatory cash flow assessment for credit sanction, under the final Directions the lenders have been asked to adopt necessary policies and SOPs for ensuring PSL classification.

The essence of the differentiation is that in case of an income generating loan, as it is for a productive economic activity, the credit evaluation shall not be restricted to just the value of the gold but also the credit profile of the borrower and its activities. .

On the other hand, in the case of a consumption loan, such an assurance is not readily available except for the collateral value. Hence, greater safeguards are required. In the new regulations, all provisions are applicable to both types of loans i.e. income generating and consumption unless specified otherwise. Wherever separate provisions are given for any specific type of loan, such provision will be applicable only to such type of loan.

Differences between the two are tabulated below: 

Basis	Income generating loan	Consumption loan
Definition	Loans extended for the purpose of productive economic activities. Such as: Farm credit Loans for businesses for commercial purposes; Loans for creation or acquisition of productive assets etc.	Any permissible loan that does not fit in the definition of income-generating loan.
Maximum Tenor	Maximum tenor not prescribed in the regulations. Usually for such loans, the tenor shall be based on the assessment of the borrower’s economic activity.   This approach also becomes relevant in case of PSL classification. Refer RBI’s FAQs on PSL (No. 9), where for gold loans it is stated that, “bank should have extended the loan based on scale of finance and assessment of credit requirement for undertaking the agriculture activity and not solely based on available collateral in the form of gold.”	In case of bullet repayment loans, maximum tenor has been prescribed as 12 months   None in case of non-bullet repaying loans.
Maximum LTV	Maximum LTV not prescribed. The same will have to be prescribed by the lenders under the respective lending policies.	Maximum LTV is based on the total consumption loan amount per borrower.   Less than equal to 2.5 Lakh – 85% > ₹2.5 lakh & ≤ ₹5 lakh – 80% > ₹5 lakh – 75%
Disclosure in notes	No obligation to disclose what subset of income generating loans are in the nature of bullet repayment	Lender to disclose bifurcation between Consumption loans and what subset of the same are bullet repayment loans

V. Restrictions for Lenders

Restrictions for lenders

No advances against primary gold, silver, or financial assets backed by primary gold/silver: Lenders shall not grant advances against such collateral.

Doubtful ownership of collateral: Lenders shall not extend loans where the ownership of collateral is doubtful. Hence, suitable documentation shall be obtained from borrowers to confirm ownership of the collateral. Given the fact that a lot of gold articles for Indian households may either be inherited, or acquired by way of wedding gift etc., suitable documentation in many cases may be a declaration. However, where the value appears to be disproportional to the apparent sources of income, lenders may take extra precaution. .

Multiple loans to the same borrower/group of borrowers: Multiple loans extended to the same borrower/group of borrowers should be evaluated for anti-money laundering and fraud-risk.

Re-pledged collateral: Lenders shall not (i) avail loans through repledging of the borrower’s collateral; and (ii) Extend loans against the re-pledged collateral .   However, it has been clarified that there is no bar on lenders obtaining finance against security of underlying receivables.

Tenor of bullet repayment consumption loans: The tenor of bullet repayment consumption loans shall not exceed 12 months. There is no such restriction on the tenor of bullet repayment income generating loans.

Top-up lending: Top-up loans may be extended only in case the existing loan is standard, based on the explicit request of the borrower, and subject to the LTV headroom.   In the case of all bullet loans (income generating or consumption), the top-up shall be allowed only after the payment of accrued interest (if any). This acts as an evergreening check.   Apparently, in case of bullet repaying loan, there is very little chance of the borrower turning an NPA except after maturity. Therefore, value of the gold so permitting, a top-up lending seems quite possible   Will the renewal of a loan be considered a restructuring of the loan? The need for restructuring arises when a borrower is facing financial difficulties that hinder timely repayment of the loan. In such cases, the lender modifies the terms of the advances to provide concessions or relaxations to the borrower. In contrast, a gold loan renewal may not involve any concessions or changes due to any financial stress;  it may merely be an extension or fresh sanction of the loan without being linked to the borrower’s financial hardship.

VI. Prudential Requirements in the loan journey

Aspect	Compliance
Credit underwriting	Lending upto ₹2.5 lakh: Under the Gold Lending Directions, lending upto ₹2.5 lakh, lenders have been provided the discretion to conduct credit assessment as per their own credit risk management framework. In such cases for instance, lenders may rely predominantly on the strength of the collateral, rather than conducting a deeper probe into the borrower’s repayment capacity, the cash-flows from the economic activity of the borrower.   Lending above ₹2.5 lakh: For lending above ₹2.5 lakh, the lenders are mandatorily required to conduct a detailed credit assessment of the borrower.   Our comments: Under the Draft Directions, the requirement for conducting credit assessment was applicable in case of all loans. However it is possible that this would have restricted credit access to poorer borrowers. Hence, in our view, this change may also be for the purpose of enabling access to credit through small ticket loans. This is also in line with the suggestions provided by the MOF.
Exposure Limits	Sectoral Limits: Given that gold is a “sensitive” sector, and the value is subject to regular fluctuations, lenders have been advised to set sectoral limits for lending against gold collateral, and include the same in their policy.   Borrower Limits: The Policy shall also capture limits for lending against a single borrower.   Weight Limits: Loans against gold and ornaments shall be subject to the following limits: (i) the aggregate weight of ornaments pledged for all loans to a borrower shall not exceed 1 kilogram for gold ornaments, and 10 kilograms for silver ornaments.   (ii) the aggregate weight of coin(s) pledged for all loans to a borrower shall not exceed 50 grams in case of gold coins, and 500 grams in case of silver coins.   LTV Limits: Specific LTV norms are prescribed for consumption loans. They are as follows:   Under ₹2.5 Lakhs: 85% Between ₹2.5 Lakhs – 5 Lakhs: 80% Greater than 5 lakhs: 75% Our comments: Here, it must be noted that for income generating loans, although no specific LTV norms have been prescribed, it does not mean that such loans will not be subject to LTV requirements. It is merely a flexibility accorded to the lender, in recognition of its credit underwriting standards and the income generating nature of the facility. Such flexibility should be leveraged in good-faith and prudentially; As regards the LTV above, the maximum LTV has been prescribed, and hence lenders may also set their internal limits that are stricter.
PSL Classification	In case the loans have been originated to classify under priority sector lending, then the lender’s policy should also include appropriate documentation to be obtained and maintained for such loans.   Loans originated by banks: In case of gold loans originated by banks, the RBI FAQs on PSL Lending clarify, that in order for such gold loans to be eligible for PSL classification, the banks should have extended the loan based on scale of finance and assessment of credit requirement for undertaking the activity.   Further, as applicable to all loans under PSL, banks should put in place proper internal controls and systems to ensure that the loans extended under priority sector are for approved purposes and the end use is continuously monitored.   Loans originated by NBFCs: PSL norms are not applicable upon NBFCs. However, NBFC originated exposures to priority sector categories, when securitised or transferred, are eligible for  PSL classification by the investing/transferee Bank (see Para 18 and 19 of PSL Directions, 2025). However, gold loans are at present excluded under the aforesaid provisions (see Para 18(ii) and Para 19(iii) of the PSL Directions, 2025).   Our comments: In our view, in case the originating NBFC, has ensured the safeguards captured for banks (i.e. credit underwriting and end-use monitoring norms), the gold loans originated should also be eligible for PSL benefit about TLE/securitisation. We hope to see enabling changes in the PSL Directions.

VII. Fair Lending Practices

Under the Gold Lending Directions (in line with the Draft Directions) lenders are required to ensure certain fair lending practices. These are:

• Loan approval and sanctioning: The Borrower’s presence is to be ensured while assaying the collateral. There shall also be standardized documents (see Heading X)
• Key Fact Statement: All the applicable charges shall be clearly included in the loan agreement, and a KFS shall flow to the borrower.
• Communications with borrower: Communications shall be as per borrower’s regional language. For illiterate borrowers, the terms shall be explained in the presence of a witness (who is not the lender’s employee)
• Misleading advertisements: In some cases, it has been observed that lenders advertise the interest rate to be a certain amount (say, 12%), however, the interest rate is a “jumping-interest-rate”, i.e. changes based on the borrower’s repayment behaviour. Repayments after a higher DPD may attract a higher interest rate. While this may be justifiable from the standpoint of compensating the lender for the increased riskiness of borrower, the facility should be advertised transparently, and the borrower should be made aware of the jumping interest rate nature of facility.
• Use of recovery agents: The Gold Lending Directions clarify that the use of recovery agents for recovery/sourcing agents, are in compliance with the applicable guidelines on outsourcing and recovery practices. For NBFCs, the applicable regulations would be Annex XIII of the SBR Directions, the IT Outsourcing Directions, and the Digital Lending Guidelines.
• Compensation: The Gold Lending Directions ensure that the borrower is able to receive compensation, and the cost of any damages to the collateral, whilst in possession of lender, is borne by lender. For each day of delay in release of collateral (beyond the stipulated timeline – i.e. 7 days of repayment/settlement), the borrower is to be compensated ₹5000. Further, it is noteworthy that the compensation above is without prejudice to the borrower’s rights under applicable law. This is a very significant consumer protection measure. Also consider that often the strata of borrowers may be such that they cannot afford lengthy court proceedings (consider that many of borrowers who take gold loans may be pledging their ancestral/inherited/bridal property in the absence of other property).
• Fairness in auction procedure has been prescribed for lenders: Auction procedure is to be as per steps prescribed.

VIII. Policy Requirement

To a large extent, RBI has given flexibility to the lenders in respect of framing conditions for gold/silver lending. However, the Directions prescribe the below mentioned aspects to be mandatorily captured in the credit policy of the lender

1. appropriate single borrower limits
2. aggregate limits for the portfolio of loans against eligible collateral
3. maximum LTV ratio permissible for such loans
4. action to be taken in cases of breach of LTV ratio
5. valuation standards and norms
6. standards of gold and silver purity
7. appropriate documentation to be obtained and maintained for loans proposed to be categorised under PSL

Notably, ‘methods to ensure end-use’ which was one of the mandatory aspects to be covered in the credit policy under the draft directions were dropped from these present directions. However, in case lenders want to originate PSL loans, in our view, the same would still need to be captured.

Further, under the Draft Directions, LTV values for both Income generating and Consumption loans were provided. However, only the LTV values for the consumption loans could make it to the final directions. Therefore, the lenders should mention the LTV values for income generating loans in their Credit Policies.

IX. SOP Requirement

Since the credit policy will provide the skeleton of the process, the flesh i.e. the minute details will be the domain of the SOPs framed under the Policy. As per the present directions, the SOP shall cover the conduct-related aspects including but not limited to the following:

1. assaying procedure;
2. criteria/ qualifications for employing assayer/ valuer;
3. the auction procedure specifying, inter alia, the trigger event for the auction of eligible collateral;
4. timeline for serving an auction notice upon the borrower;
5. mode of auction;
6. notice period allowed to the borrower(s)/ legal heir(s) for settlement of loan before auction;
7. empanelment of auctioneers;
8. Procedure to be followed in case of loss, discrepancy in quantity or purity, or deterioration of eligible collateral during internal audit or otherwise, including at the time of return or auction, and fair compensation to be paid to the borrower(s)/legal heir(s) in such cases, along with timelines for effecting the same;

In addition to the above, in our view, the following key considerations should also find their way either in the Credit Policy or the SOPs framed thereunder:

Aspects	Compliance
Disbursements	Loans to generally be disbursed into customer accounts directly.   An exception is made for flow of money between lenders for co-lending transactions.
	Bank transfers: Funds directly in lender and borrower account; no routing through third party accounts (exceptions similar to DL Guidelines may be considered)
	Cash transactions: Comply with provisions of IT Act, KYC Directions and PMLA
Disclosures	Disclosure in notes to account: Amount and percentage of loans extended against eligible collateral to total assets
	Separately for IG and consumption purposes
	Specific disclosures to be made for lending against silver collateral
Multiple loans	Multiple loans simultaneously to a single borrower/ group of related borrowers to be subject to stricter internal audit
Collateral management	Necessary infrastructure and security measures to be put in place for handling of gold collateral. Gold to be handled at own branches and by own employees Loans to not be extended by branches not having secured facility

X. Minimum Clauses to be added in the loan agreement

XI. Concluding notes – persisting ambiguities:

The flavour of the Gold Lending Directions is – a harmonised framework, consumer protection, and plugging the irregularities observed by the regulator in the past (see here our resource on the same).

However, it may be noted that the Gold Lending Directions have not repealed the provisions related to gold lending by NBFCs under the SBR Directions. It is important to note that the Draft Directions had proposed repealing para 37 (except 37.1.2 which deals with providing a loan for purchase of gold) and para 45.14 of the SBR Directions dealing with the provisions for gold lending. The miss out can lead to either of the following interpretations:

1. NBFCs will be required to adhere to the provisions of the SBR Directions in addition to the Gold Lending Directions – This does not seem likely since there are quite a few contradictions in the existing and new provisions.
2. Para 37 and 45.14 will be repealed/ amended to align with the Gold Lending Directions- this would require necessary action from the RBI.
3. Para 37 and 45.14 will not apply entirely and these Gold Lending Directions will prevail- however, this would require to be explicitly prescribed under the repeal provisions.

Our Resources in relation to the same:

• Readers interested in a “bird’s-eye” view of the Draft Directions, for a better study of the regulation, may also view our resource here!
• Our comprehensive book on NBFC Regulations, available here, contains a comprehensive section on the law as well as business of gold lending.
• Our Shatrartha (Video), on the Draft Directions, here.