Draft gold loan norms: FinMin seeks exemption for small-ticket borrowers

The ministry has suggested exempting gold loans below ₹2 lakh from RBI's proposed norms. This move may benefit 60-70% borrowers

The Union finance ministry has suggested exempting gold loans below ₹2 lakh from the Reserve Bank of India’s (RBI’s) proposed directions on lending against the yellow metal as collateral.

 

The ministry has said the RBI’s directions have been examined by the Department of Financial Services (DFS), under Union Finance Minister Nirmala Sitharaman’s guidance.

 

“The DFS has given suggestions to the RBI to ensure that the requirements of small gold loan borrowers are not adversely affected,” the department said in an official statement.

 

The DFS suggestion will benefit 60-70 per cent of borrowers.

 

According to industry estimates, the average size of gold loans is ₹1.1 lakh-1.2 lakh. These are short-term loans, for which the maximum repayment tenure is 24 months. On average, customers pay back in seven-eight months. 

 

Some non-banking financial companies (NBFCs) like Muthoot Finance, Manappuram Finance and IIFL Finance are major players in this business. Gold loans of NBFCs are around ₹3 trillion.

 

Shares of Muthoot Finance, the largest gold-loan NBFC, jumped 7.29 per cent on the BSE on Friday to close at ₹2,216.35. 

 

Manappuram and IIFL shares also gained while the benchmark index ended in the red.

 

The DFS has stated such guidelines will need time to take effect and hence they may be suitable for implementation from January 1 next year.

 

In April, the RBI came up with the draft norms, which mandated, among others, that borrowers furnish proof of ownership for the gold to be used as collateral. However, this poses a challenge because gold passes through generations and hence it is difficult to produce the original invoice.

 

The norms said lenders should keep a record of verification of the ownership of the collateral. 

 

The draft also defined the type of gold against which loans can be taken. Only gold jewellery, ornaments, and specified gold coins are eligible as collateral. 

 

Before releasing the guidelines, the RBI did a joint supervisory review that uncovered several lapses. These included inadequately monitoring the loan-to-value (LTV) ratio, flawed risk evaluation, misusing third-party agents, and a lack of transparency in auctions.

 

The regulator is reviewing the feedback on the guidelines. The DFS said its suggestions had been forwarded to the RBI.

 

 

In its Annual Report, the RBI directed lenders to assess and rectify shortcomings in their gold-loan operations without delay.

 

According to the proposed regulations, lenders must maintain an LTV ratio, including the interest component, below 75 per cent throughout the loan’s tenure. 

 

This revision could lower disbursements under bullet repayment models from the current 65-68 per cent to 55-60 per cent of the pledged gold’s value.

 

Loans structured with equated monthly instalments (EMIs), where repayment is gradual, may be permitted a slightly higher LTV.

 

The guidelines also propose that financial institutions limit the proportion of gold loans in their lending portfolios.

 

NBFC officials say the draft norms may keep away women borrowers, small traders, and rural people from formal credit because of clauses such as proof of ownership, purity certificates, and a stricter definition of what constitutes collateral.

 

“The suggestions of the finance ministry are practical,” said Amlan Singh, head of operations and customer service, IIFL Finance. 

 

“In gold loans, it is the speed of disbursement that customers look for. The more the rules turn stringent, the more customers move to the unorganised sector. The draft regulation will make gold loans from regulated entities difficult for small borrowers. The unorganised sector lends at a higher rate of interest,” Singh told Business Standard.

 

Gold loans are often seen as a last resort for getting credit because there is no income proof required. 

 

Recently protests erupted in Tamil Nadu, where farmers, owners of small units, and consumers have opposed the new guidelines. 

 

Consequently, the Tamil Nadu Chief Minister’s Office suggested to the RBI that gold-loan guidelines be relaxed.

 

George Alexander Muthoot, managing director, Muthoot Finance, said: “The phased implementation, timeline, and exemption for gold loans below ₹2 lakh reflect a deep understanding of India’s underserved and rural borrowers, who largely depend on gold-backed credit for livelihood, education, and emergencies.” 

 

Rating agency Icra has estimated that organised gold loans of banks and NBFCs will exceed ₹10 trillion this financial year and they will reach ₹15 trillion by March 2027. 

 

NBFCs’ gold-loan portfolio is expected to expand at 17-19 per cent.