Proposed RBI rules to hurt gold loans in rural & semi-urban India

Bengaluru: Gold loans have been long-considered a tool for financial inclusivity by providing credit access to underserved populations in India. At a time when gold prices are rocketing, the Reserve Bank of India’s (RBI’s) draft guidelines for gold loans have brought in fears of slowdown and a hampering of growth for formal lenders, particularly in rural and semi-urban areas.

Most recently, the Finance Ministry recommended that the RBI exempt small-ticket borrowers (below Rs 2 lakh) from the stricter guidelines, and give time till January 1, 2026 before their implementation.

The recommendations come after Tamil Nadu’s Chief Minister MK Stalin wrote a letter to Finance Minister Nirmala Sitharaman to roll back the norms, warning of the possibility of rural credit disruption and an increase in informal lending.

Tamil Nadu farmers and other associations have pointed out similar risks. South India is the dominant market for gold loans, with 79.10% share of the total outstanding loans, as per a report by PwC. A major chunk of these loans are from Tamil Nadu.

However, even if the recommendations are incorporated, several risks remain, according to industry stakeholders. While there are merits such as increased clarity in the guidelines, they pointed to disadvantages such as the loan-to-value (LTV) ratio change, ownership proof requirements, and higher operational costs for lenders.

Lenders have pointed out that with the new maximum LTV ratio, customers’ net cash availability against gold will be reduced.

Puja Abhishek Singh, CEO, Manipal Fintech, explained, “Earlier, the loan LTV had been used by many gold loan lenders without considering the interest component at the time of loan disbursal. With new norms, that becomes part of LTV and hence the borrower will get lower value of their gold that is being pledged, as 75% LTV will include both interest and principal component throughout the tenure of the loan. This will lead to people reaching out to informal lenders."

Umesh Mohanan, ED and CEO, Indel Money, pointed out, “It is not just the farmers affected, but the (broader) rural and the semi-urban (people) also. With this curtailing in the LTV limits and people understanding that going to a non-banking financial company (NBFC) or bank means a lesser amount of money, it is a big risk. The LTV tweaking actually drives away rural and semi-urban customers to resort to other means of finance, which is from the unorganised sector.”

Already, a large majority of the gold loan business comes under moneylenders and informal routes.

Mohanan added, “Another issue is the re-pledged system as with gold loans, as the underwriting does not take place on the individual's name but the ornament. If my gold loan becomes a non-performing asset (NPA), I will not be able to re-pledge it immediately. RBI is also speaking about certain ownership proof. Ownership proof can only be an undertaking. There is no other route to claim the ownership proof because in India, gold handed down generations.”

Experts also pointed to concerns regarding end-use documentation requirements in the guidelines. The end-use is largely for agricultural purposes. AM Karthik, co-group head and senior vice president, ICRA Ltd, explained, “The draft regulations say that for any loan which is for productive purposes, including agriculture, lenders would have to implement adequate credit appraisal mechanisms, especially pertaining to assessment of repayment capacity and cash flow generation.”

Risks are further exacerbated due to the decline of microfinance, which further increased rural borrowers’ dependence on gold loans.

Experts added that organisations’ operational costs will also increase with the required changes, and certain requirements related may be more difficult for fintechs and online gold forums to comply with.