RBI Governor on 9th April 2025, after the Monetary Policy Committee meeting, announced that co-lending model will be expanded and a draft guideline for lending against gold will be circulated. RBI / 2025-26 / DOR.CRE.CRE.REC./ 21.01.23 / 2025-26 dated NIL has shared the draft on lending against GOLD collateral directions 2025.
In the introduction, RBI has restricted lending against primary gold / gold bullion due to broader means, prudential concerns, as also due to speculative and non-productive nature of gold. This is fine, but, RBI , in the name of putting in place a ‘harmonized regulatory framework’ of such laws applicable across various Regulated Entities (REs) and address the concerns observed relating to some of the lending practices being followed and provide necessary clarity on certain aspects and strengthen the conduct-related aspects, is throwing the baby with the bath water.
How?
While RBI itself says that REs have been permitted to lend against this collateral security of the gold jewellery and ornaments for meeting the short-term financing needs of the borrowers, the instructions in the draft will make it impossible for the bankers as well as the customers to have gold loans.
- Loan-to-Value (LTV) Ratio Cap: LTV, which is 80% of the value of the gold at present, has been reduced to 75%, making the loan value lesser for the borrower. Where gold prices are steadily going up, there is no need to reduce LTV. Banks do not loose in gold loans even if they are not repaid as they get back the money through auction.
- Borrowers to Provide Proof of Ownership: Most of the gold ornaments are inherited. While purchasing new ornaments, you need PAN, so the same may not be purchased in the name of children to whom they are gifted. To get proof of ownership will be impossible for most of the people. So they will be forced to go to private borrowers and money lenders.
- Borrowers to Get Gold Purity Certificate from Banks: Bankers play different roles, but asking them to be goldsmiths is a joke. Even if they use an assessor, if they have to issue a gold purity certificate, that is not correct. Because of fear, they will just tell the borrower to go somewhere else, i.e., to the moneylenders.
- Gold Loans Available Only Against Eligible Forms of Gold: Gold loans are given for emergencies, and if they can’t be given beyond 50 grams of coins or small biscuits, there will be a number of people affected, especially those who get the gold from their NRI husbands.
- Loans Can Be Taken Against Silver as Well: No bank will have space to keep silver vessels, verify their purity, and give loans. This will once again help the moneylenders, especially Non-Banking Finance Companies (NBFCs).
- Loan Limits: There is a ceiling on loans up to 1 kg of gold, which is welcome, but saying it should be for income-generating purposes destroys the purpose of emergency loans. Another instruction is that credit approval and due diligence have to be done. Do the bankers have time when public banks are heavily understaffed? One more condition is that the repaying capacity of the borrower has to be assessed.
- Calculation of Gold Value for Loan Amount: Already bankers are doing this. Now, in the name of purity certificate, assayer, etc., the process is made cumbersome. For example, State Bank of India (SBI) does not use appraisers and so for the borrower, there is no appraiser charge. Now, SBI will also have to do that.
- The Loan Agreement Will Have Complete Details: Nobody reads a loan agreement before signing. Instead of making it simple, complicating it by recording method of auction, procedures to be followed, etc., RBI is making it complicated.
- Release of Gold Collaterals Within 7 Days: The ornaments have to be handed over on closure of loans. Why 7 days? Banks return the same on the same day. This is once again a facility created to help many lenders like the NBFCs.
Earlier Instructions which are detrimental:
In September 2024, RBI has told that the gold loans cannot be renewed but the full balance has to be repaid. So on the same day, now loan cannot be sanctioned. This makes it so difficult for the borrowers. As the gold value keeps going up, it is easy to renew by giving even a higher amount. This again forces people to go to the NBFC money lenders and pawn brokers.
Why These Guidelines or Instructions?
Contrary to this harmonized regulatory framework, the guidelines appear to be an effort to chase poor and middle-class borrowers who avail gold loans for emergency. RBI is forcing them to go to money lenders including NBFCs and lose their gold due to higher interest. Southern India will be more affected. Gold loans are availed more in South India than other parts of the country. Now the people of South India will be affected due to these new guidelines. Is it the punishment for not voting the present dispensation?
Co-lending is a questionable model pushed by RBI without any study on its impacts. This needs to be reviewed.
What Is to Be Done?
RBI should withdraw the draft, have larger consultations with stakeholders, make procedures simple and not complicated.
Thomas Franco is the former General Secretary of the All India Bank Officers’ Confederation and a Steering Committee Member at the Global Labour University.
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