RBI signals easier gold loan rules for small-ticket borrowers in final guidelines

The Reserve Bank of India (RBI) has introduced a new set of guidelines for gold-backed loans, signaling a more cautious approach to lending in the non-banking financial sector (NBFC). This move primarily affects small-ticket loans secured by gold, which are widely used across semi-urban and rural India.

The central bank's latest directive brings tighter controls to ensure responsible lending practices and to curb the growing risks associated with excessive leverage.

Key Change: Lower Loan-to-Value Cap for Short-Term Loans

Under the new rules, the RBI has set a stricter Loan-to-Value (LTV) ratio for small gold loans with short repayment periods. This means that borrowers will now be able to get less money for the same amount of gold pledged, especially if the loan is of shorter tenure—typically under one year.

Previously, many NBFCs were offering gold loans with an LTV ratio close to 75%, or even higher in certain promotional schemes. With the revision, the regulator aims to reduce systemic risk and protect borrowers from becoming over-leveraged.

Why the RBI Acted

Gold loans have witnessed a surge in demand, particularly post-pandemic, as they provide quick liquidity. But this has also led to concerns over loan stacking, poor repayment discipline, and aggressive loan recovery practices.

Several NBFCs were found to be offering high-value loans with minimal repayment periods and loose documentation, raising concerns over transparency and borrower vulnerability. The RBI’s new norms seek to ensure that credit discipline is maintained while still allowing gold to serve as a lifeline for many.

Impact on Borrowers

Lower Loan Amounts: For the same quantity of gold, borrowers will now receive a lower loan value.

More Scrutiny: NBFCs will likely tighten their KYC and credit evaluation processes.

EMI Plans May Change: Structured EMIs could replace bullet repayment options for some segments.

Impact on NBFCs

Loan Growth May Slow: Particularly in Tier-2 and Tier-3 cities where gold loans are a key product.

Profit Margins Could Shrink: As lower LTVs may reduce volumes and increase customer churn.

Need for Recalibration: Lenders may revise their marketing and product mix to align with the new norms.

What Lies Ahead?

The RBI’s move comes at a time when gold prices are hovering near record highs, making it tempting for lenders and borrowers alike to cash in. However, by pulling in the reins, the central bank is signaling that risk management cannot be compromised, even in high-demand segments like gold-backed lending.