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RBI sets standards for gold loans as a component of new regulations

The Reserve Bank of India (RBI) has recently proposed stringent regulations for gold-backed loans to enhance risk management and ensure financial stability. This move comes in response to a significant surge in gold loans and the identification of irregular practices within the industry.

Background: The Surge in Gold Loans

Between September 2024 and February 2025, banks’ gold loans in India increased by 30%, outpacing the growth of overall loans. This surge was partly due to tighter norms for unsecured lending and record-high gold prices, making gold loans an attractive option for borrowers. However, this rapid growth raised concerns about potential risks and irregularities in the gold loan sector.

Identified Irregularities and RBI’s Response

In September 2024, the RBI identified several irregular practices in the gold loan industry, including:
  • Use of third parties for sourcing and appraising gold loans.
  •  Not valuing gold in the customer’s presence.
  • Inadequate due diligence.
  •  Lack of monitoring of borrowed funds.

The central bank urged lenders to comprehensively review their processes and address these regulatory lapses to protect consumer interests and maintain financial stability.

Proposed Regulatory Measures

In April 2025, the RBI proposed a series of guidelines aimed at strengthening the gold loan sector:

1. Loan-to-Value (LTV) Ratio: Enforcing a maximum LTV ratio of 75% to ensure that loans do not exceed three-quarters of the gold’s value.
2. Single-Borrower and Sectoral Limits: Establishing appropriate limits for lenders’ gold loan portfolios to mitigate concentration risks.
3. Standardized Gold Assessment: Implementing consistent methods across all branches for assessing the weight and purity of gold collateral.
4. Monitoring End-Use of Funds: Requiring lenders to monitor and maintain documentary evidence of how borrowers utilize the loaned amount.
5. Renewals and Top-Ups: Restricting renewals or top-ups of gold loans to non-stressed accounts within the permissible LTV limits.
6. Collateral Pledging: Prohibiting the use of the same gold collateral for multiple loans and barring loans if collateral ownership is unclear.
These measures aim to standardize protocols across lenders, enhance transparency, and ensure adherence to regulations.

Impact on Non-Banking Financial Companies (NBFCs)

The proposed regulations are expected to have a significant impact on NBFCs, which have been major players in the gold loan market. In March 2025, the RBI found that some NBFCs were flouting cash disbursal norms by circumventing rules through indemnity forms, leading to increased scrutiny and advisories from the central bank.

Market Reactions and Financial Implications

The RBI’s scrutiny has led to market reactions, with shares of major gold loan lenders, such as Manappuram Finance and Muthoot Finance, experiencing declines. Investors are concerned that the tightening of processes may affect growth and asset quality recognition at gold financiers.

Conclusion

The RBI’s proposed regulations for gold loans reflect a proactive approach to address the rapid growth and associated risks in the sector. By enforcing stricter underwriting processes, enhancing collateral management, and monitoring the end-use of funds, the central bank aims to protect consumer interests and maintain financial stability. Lenders, especially NBFCs, will need to adapt to these changes to ensure compliance and sustain their operations in the evolving regulatory landscape.

Question 1: Discuss the rationale behind the Reserve Bank of India’s proposed regulatory framework for gold loans. How will these measures impact Non-Banking Financial Companies (NBFCs) and financial inclusion in India? (250 words)

Question 2: Examine the role of gold loans in India’s credit ecosystem. In light of recent RBI guidelines, analyze their impact on financial inclusion, NBFCs, and overall economic resilience.” ( 250 words )

Source – The Hindu Newspaper

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