RBI moots classification of loans against gold jewellery based on end use

Mumbai: The Reserve Bank of India on Wednesday issued a draft circular proposing measures to strengthen norms for loans given against gold ornaments and jewellery. 

These include classifying gold loans as ‘income generating’ and ‘consumption’ loans, setting a floor price for gold auctions, allowing top-up loans or loan renewals only against existing gold loans classified as ‘standard’, and barring loans against gold-based securities such as gold ETFs and gold mutual funds.

The norms will also apply to loans secured by silver jewellery, silver ornaments and specified silver coins “wherever lenders are permitted to extend loans against such collaterals,” the central bank said.

The revised framework proposes to harmonize such regulations across different regulated entities and address a “few concerns”, the regulator said, seeking feedback on the norms by 12 May, 2025. 

Following the initial announcement by RBI Governor Sanjay Malhotra on the revised framework for gold loans, stocks of non-bank gold financiers such as Manappuram Finance, and Muthoot Finance fell upto 10% on Wednesday on fear of tighter norms. Shares of these lenders later pared some losses but ended the day in the red, ahead of the release of the draft circular.

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In the policy conference, RBI clarified that the revised framework aims to harmonize the norms between different regulated norms and not make them tighter.

“The markets are reading it the way they will read it, based on emotions etc,” Malhotra said.

“To our mind there is no tightening, it is a rationalization. It's broadly an extension of whatever, on the conduct side primarily, were the guidelines for NBFCs, those have been extended now to the banking sector also.”

Analysts at Bernstein said in a note, "While there is likely a short-term impact on the disbursal value for Muthoot (potentially offset by rising gold prices), we view this as a positive event given it standardizes the regulations across lenders and also lifts the regulatory overhang on the segment." 

Background

The new framework follows multiple actions by the central bank over the past year to crackdown on gold lending practices, particularly loan auction and gold storage processes followed by non-bank lenders and gold-based agri-credit given by some public sector banks.

Since prohibiting IIFL Finance Ltd from issuing fresh gold loans in March 2024, RBI has been asking other gold financiers to address concerns such as breach of loan to value (LTV) ratios, varying auction policies and processes, and deviations in evaluating and certifying the pledged gold's purity and weight while sanctioning loans and auctioning on default.

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In May 2024, the RBI tightened the cash route in gold loans, capping cash loans at ₹20,000 against the pledged gold. In September 2024, it asked gold financiers to thoroughly review their policies, processes, and practices to identify any gaps within three months, and closely monitor the high growth in the segment. The ban on IIFL Finance was also lifted in the same month.

Mint, had in December 2024, reported that gold financiers are auctioning the collateral in higher quantities to recover stressed loans, at a time of rising regulatory scrutiny over the sector. Gold auctions rose sequentially in the second quarter of FY25 with expectations of a further increase in the second half of the financial year as lenders comply with the new directions.

Loan classification, LTV rationalization

Lenders will now be required to categorize ‘income generating' gold loans as per the purpose for which they are extended and not as 'gold loans’. The quantum and tenor of these loans will need to be assessed on the basis of credit requirement and cash flows likely to be generated through the economic activity and not value of the collateral.

RBI defines ‘income generating loans’ as gold loans extended for the purpose of productive economic activities, such as farm credit, business/ commercial purposes, and creation/ acquisition of productive assets, among others.

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Lenders will need to prescribe the maximum LTV ratio for various loans sanctioned against eligible gold collateral based on their risk assessment, wherein the maximum LTV ratio for consumption gold loans will be capped at 75% of the value of gold.

For gold loans sanctioned by NBFCs, the LTV ceiling of 75% will continue to be applicable, irrespective of the purpose of the loan sanction. In the case of bullet repayment loans, LTV ratio will need to be computed by treating the total amount repayable by the borrower at maturity rather than the loan sanctioned at origination.

“The prescribed LTV ratio shall be maintained on an ongoing basis throughout the tenor of the loan,” RBI said, adding that in case of breach of the LTV ratio for more than 30 days, the entire outstanding amount will attract additional standard asset provisioning of 1%. This additional provisioning can be rolled back only when the LTV ratio falls and remains below the limit for at least 30 days. If the loan is in breach of LTV ratio as on the date of maturity, no renewal shall be permitted.

This 75% cap on LTV on an ongoing basis could have some “near-term impact” on growth of gold loans, said A.M. Karthik, senior vice president and co-group head, Financial Sector Ratings, Icra. He added that the additional 1% provision should however be manageable for large NBFCs “considering their overall business yield and healthy earnings performance”.

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RBI has also asked lenders to ensure that necessary infrastructure and facilities, including safe deposit vaults, are put in place and appropriate security measures taken in every branch where gold loans are sanctioned. The gold collateral can be handled only in these specified branches and only by the employees of the financier.

At the time of repayment or settlement of the loan, lenders will be required to release or return the gold collateral held as security within seven working days. In case of delays, lenders will need to compensate the borrower at the rate of ₹5,000 for each day of delay beyond the seven-day timeline. Pledged gold collateral lying with the lenders beyond two years from the date of settlement will be treated as ‘unclaimed’.

Harmonizing, strengthening gold loan norms

As per the revised framework, lenders will only be allowed to sanction loan renewals and top-up loans, if the existing loans are classified as standard and following a formal request by the borrower. Further, top-ups or renewals of bullet repayment loans may be extended only after repayment of interest accrued.

Further, same gold collateral cannot be used concurrently for income generating as well as consumption loans. Lenders will also need to declare a reserve price for the gold collateral at the time of auction, subject to the reserve price being at least 90% of its current value.

Lenders will be required to put in place a ceiling on the loan portfolio secured by eligible gold collateral as a proportion of their total loans and advances, which must be reviewed periodically.

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The tenor of consumption gold loans, in the nature of bullet repayment loans, has been capped at 12 months. The loan amount for such loans by co-operative and regional rural banks is proposed to be capped at ₹5 lakh per borrower.

Lenders will not be allowed to grant any loans against financial assets backed by primary gold/silver like units of Exchange-traded funds (ETFs) or mutual funds. They will also not be allowed to extend loans against re-pledged gold collateral, where the ownership of the collateral is doubtful.

The central bank also proposed that norms for lending against gold collateral will need to be a part of the credit/ risk management policy of lenders; and should include appropriate single borrower limits and sectoral limits, assaying procedure for valuation of collateral, mechanisms to ensure end-use, LTV ratio, valuation standards and norms, and standards of gold purity, with loans being sanctioned on the basis of the repayment capacity of borrowers. “Lenders shall put in place proper systems and controls to ensure that end-use of these loans are periodically monitored and relevant evidence are put on record,” RBI said.