Gold loans are a quick way to access secured credit. Moreover, given propensity of Indian households towards gold, this is also an asset.
RBI has released a draft circular (Lending against Gold Collateral-Directions, 2025) for gold loans and has made important changes to how gold loans shall be doled out in the future. Of course, this is still a draft circular, and the central bank may still make changes while releasing the final circular.
We are talking about master directions here. Hence, most of the circular is simply a rehash of the existing rules. Still, RBI has proposed a few prominent changes. Such changes include:
- Classifying gold loans based on the end use.
- Requirement of establishment of ownership of gold.
- Tweak in how LTV for bullet repayment loans is calculated.
Two Types of Gold Loans
- Consumption loan: are gold loans extended to meet emergency requirements, medical needs, purchase of consumer durables, or anything that does not help in generating any income.
- Income generating loan: are gold loans extended for any income generating activity or a productive economic activity. This could include farm credit, loans of purchase for business/commercial purposes, or purchase/creation of any productive assets.
RBI says any gold loan that is not an income generating loan can be termed as a “consumption loan”.
How does the classification matter?
- Same eligible gold collateral cannot be used to extend both income generating loan and consumption loan. This is irrespective of the value of collateral.
- The banks shall monitor the end use for ALL income generating loans and for consumption loans above a certain threshold. As I understand, the RBI intends to leave this “threshold” to the bank’s discretion.
- The quantum and tenure of income generating loans will depend on the underlying requirement and the cashflow from the activity. This will not be on the basis of the gold collateral. Additionally, banks must create charge on assets created out of that loan, in addition to taking gold as collateral.
Why Will Anyone Sign up for Income Generating Loans?
I do not get this completely either. Why would anybody sign up for an income generating loan? There seems to be no advantage. Only hassles.
As I understand, this requirement of tracking the end-use of gold loan is a completely new requirement. I am also not sure if and how the banks will track this. Or if it even makes sense to track the end-use. The bank has the collateral which can be used to close the loan if the borrower does not pay.
What Is an Eligible Collateral for Gold Loans?
- The banks shall NOT provide any gold loans against primary gold/silver. “Primary gold” means gold in unfinished form or semi-finished form. This will include bullion, ingots, bars, blocks, slabs, billets, shots, pellets, rods, sheets, foils, and wires.
- The banks shall NOT provide any loans against gold ETFs and gold mutual fund units. Or any other financial asset backed by primary gold. Please note Sovereign gold bonds (SGBs) are still eligible for gold loans. SGBs are not backed by “Primary gold”. Only backed by a guarantee from the Govt. of India.
- The banks shall not extend loans against gold where the ownership of gold is doubtful. Going forward, the banks are required to keep a record of the verification of the ownership of pledged gold. In case the proof of ownership (purchase receipt) etc. is not available with the borrower, the borrower must submit a declaration/undertaking explaining the ownership of the collateral.
- The aggregate weight of gold or silver ornaments shall not exceed 1 kg per borrower.
- The weight of coins eligible for collateral is capped at 50 gm for gold coins and 500 gm for silver coins. Only 22 or higher carat gold coins are eligible for collateral. Such coins must have been sold by banks. Coins sold by entities other than banks are not eligible collateral.
- Gold jewellery less than 22 carats would still be considered for loans. However, the loan value will also go down based on gold purity.
What Shall Be the Loan-to-Value (LTV) for Such Loans?
- RBI has capped the LTV for consumption gold loans at 75% of the value of gold. For “income generating” loans too, the cap will be 75%. However, as mentioned above, the quantum of loan for “income generating” loans will also depend on cashflows that the underlying asset (purchased/created using the gold loan) would generate.
- Note 75% (this is also the cap currently) is the cap imposed by the Reserve Bank. The banks can always have a lower internal cap.
- For bullet repayment loans, the lender must calculate LTV by considering the repayment amount at the time of loan maturity, not at the time of origination. As I understand, this is a new development. While, even earlier too, the banks would consider this interest angle while extending loan, the Reserve Bank makes it quite explicit. And this brings down loan eligibility. Hence, if the bullet repayment gold loan is at 15% p.a., the loan eligibility automatically goes down by about 13%.
- Let’s understand this with the help of an example. Let’s say you have gold worth Rs 100. You can get a loan of Rs 75 at 75% LTV. However, if it is bullet repayment (with interest payout also at maturity), then you will get a loan of only Rs 65.2. Over the year, you will have interest liability of Rs 9.8 (at 15% p.a.). Rs 65.2 + Rs 9.8 = Rs 75.
- Under bullet repayment loans, you pay principal at one go. At the time of maturity of loan. For such loans, the tenure must also be capped at 12 months.
- While I do not have the exact numbers, the bullet repayment loans would form a good percentage of gold loans. This new rule, if applicable, in present form, would reduce gold loan eligibility.
- The lenders must maintain this LTV requirement throughout the loan tenure (and not just at the time of disbursal). RBI also proposes a penalty on the lender (in form of additional provisioning) if a loan is in breach of this LTV cap for more than 30 consecutive days.
While RBI may have genuine reasons for proposing these changes, this has caused concerns among various quarters, with even the Government (Department of Financial Services) proposing waiver of these conditions for small borrowers.
We will have to wait and see how RBI responds.