Why in news
On April 9, RBI released draft guidelines on loans against gold collateral.
The goal is to standardize rules for banks and NBFCs and address differences in lending practices.
What was the response to the proposals?
Tamil Nadu CM M.K. Stalin asked the Finance Minister to intervene, warning the rules could disrupt rural credit, especially for farmers and allied sectors.
The Finance Ministry assured that new rules won't harm small borrowers and will be implemented only from January 1, 2026.
Gold loans are crucial for short-term agricultural credit in many parts of South India.
Why did the RBI want to step in?
RBI flagged irregularities as gold loans grew rapidly in 2024 (50% increase overall, 104% in banks).
The draft aims to protect borrowers, clarify credit processes, and improve transparency.
Rising gold prices and credit gaps have increased demand for gold loans, especially in the informal sector.
What are the key changes?
Maximum Loan-To-Value (LTV) ratio capped at 75%.
Interest for bullet loans included in LTV calculation, effectively reducing loan amounts.
Borrowers must prove gold ownership; lenders must assess purity and weight uniformly.
Gold valued based on 22-carat price.
No simultaneous loans for consumption and income generation allowed.
Loan renewals or top-ups only if the loan is standard and meets LTV norms.
Full repayment of principal and interest needed before a fresh loan.
Lenders must return collateral within 7 days after repayment or pay ₹5,000/day as compensation.
How will changes impact regulated entities?
Borrowers lose some flexibility; NBFCs face limits on easy loan renewals/top-ups.
Compliance and documentation burdens will increase.
Smaller NBFCs relying on re-pledging may face funding issues, causing market consolidation.
Higher operational costs may increase interest rates for borrowers.
Growth in gold loan portfolios may slow due to lower LTV at disbursement.
Will a one-size-fits-all policy work?
Gold loans are vital for rural and semi-urban households as a key credit source.
RBI could consider separate rules for small micro gold loans and large structured gold loans.
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