Due to geopolitical and economic uncertainty, there has been a sudden increase in the demand for gold. At the same time, central banks around the world have also been increasing their gold investments, which has further boosted its prices.
The weakening of the Indian rupee against the dollar has made gold more expensive to buy in India. These changes have benefitted those who have taken loans by pledging gold.
Additionally, interest in gold loans has risen due to the Reserve Bank of India (RBI) tightening rules for unsecured loans.
From January 2024 to January 2025, gold prices have surged by more than 30%, while the outstanding gold loans have risen by 77%. This rise has also led to an increase in non-performing assets (NPAs) in gold loans.
RBI’s Efforts to Control Gold Loans
The government and RBI are closely monitoring the rapid growth in gold loans. In response, the RBI recently proposed new measures aimed at regulating the gold loan market, which could have a significant impact.
The new proposal includes several key points. It restricts gold loan companies and banks from accepting primary gold, gold-backed financial assets, or replaced gold as collateral.
Additionally, they will need to evaluate whether the loan money will be used to increase the borrower’s income or for other purposes.
Stricter Rules for Gold Loan Repayment
For customers taking gold loans for consumption with bullet repayment options, the rules are set to become more stringent. For example, the maximum loan tenure will be capped at 12 months.
Additionally, the loan-to-value (LTV) ratio, which determines how much of the total value of the gold can be lent, will be strictly limited to 75%.
If this limit exceeds 75% for more than 30 days during the loan period, the lending institution will be required to set aside 1% of the loan amount as a provision.
Monitoring the Use of Loan Money
The proposed rules also aim to monitor how the loan money is being used. If the loan is provided to increase income, the lender will need to assess the customer’s business cash flow.
One of the main goals of the proposal is to prevent the practice of evergreening, where loans are continuously rolled over without being repaid.
Both the government and RBI are particularly sensitive to the rapid increase in gold loans, as borrowers often resort to pledging gold only when they have no other option to raise funds.
Precautions for Banks and NBFCs
In rural and semi-urban areas, where gold loan interest has surged, it’s especially important to be cautious when issuing loans.
In these areas, people’s incomes are often tied to agriculture or small businesses, which can vary greatly. As a result, banks
and non-banking financial companies (NBFCs) need to exercise more care when granting loans. Experts believe that NBFCs have already been aligning their practices with the new RBI regulations.
