Why is the RBI changing gold loan rules? | Explained

The story so far: On April 9, the Reserve Bank of India (RBI) released draft directions on loans against gold collateral with the objective to harmonise the regulatory framework across regulated entities (banks and Non-Banking Financial Companies (NBFC)) and address differences in lending practices.

- GNS News Agency

What was the response to the proposals?

Tamil Nadu Chief Minister M.K. Stalin wrote to Finance Minister Nirmala Sitharaman, seeking her intervention, pointing out that the proposal was likely to result in “serious disruptions to the rural credit delivery system in Tamil Nadu and across many parts of south India”. The Ministry of Finance clarified that it has asked the RBI to ensure that the regulations on gold loans do not adversely impact small gold loan borrowers. It also noted that the new rules would be implemented only by January 1, 2026. Mr. Stalin had said that gold-backed loans serve as a primary source of short-term agricultural credit, especially for small farmers, and those engaged in allied sectors such as dairy and poultry.

Why did the RBI want to step in?

The draft directions come in the backdrop of the RBI highlighting irregular practices amid a significant increase in the loan-against-gold jewellery portfolio of some lenders in September 2024. In the last fiscal, the combined loans against gold jewellery portfolio of banks and NBFCs was estimated to have grown by over 50%; for banks alone, the business more than doubled, growing at 104%, which set alarm bells ringing. The draft directions on loans against gold collateral aim to harmonise the regulatory framework across regulated entities and address the differences in lending practices. The directions aim at protecting the interest of borrowers; to provide clarity on certain credit and operational processes followed by lenders; and to enhance transparency and disclosure. C.V. Rajendran, Adviser, Arvog, said, “The draft circular comes at a critical juncture when rising gold prices and widening credit gaps are prompting more individuals, especially from the informal economy, to pledge household gold for short-term liquidity.”

What are the key changes?