5 min readMumbaiMar 23, 2025 03:56 AM IST
First published on: Mar 23, 2025 at 03:56 AM IST
JV Joseph had taken a gold loan of Rs 5.3 lakh for one year from a nationalised bank’s Kochi branch at an interest rate of 12 per cent a year ago. However, when he received a notice from the bank for repayment of the loan amount on March 1, he was in a fix.
The bank demanded that Joseph must repay the loan and close it in order to receive an extension of one more year, failing which the gold would be auctioned. However, Joseph, who was broke, was unable to repay the loan and he wanted to repledge the gold and extend the loan. The catch was that the bank insisted he repay the full loan amount before repledging it. After lengthy negotiations, the bank provided an overdraft facility for a few hours to facilitate the closure and repledging, but this is not a luxury many borrowers can take recourse to.
Joseph’s experience with a gold loan is a stark reminder of the challenges borrowers face from banks in the gold loans segment.
After the Reserve Bank of India (RBI) asked lenders to tighten the gold loans processes in September last year, the new system introduced by banks has come under fire from borrowers, who are now required to repay the full principal and interest on the loan if they want to repledge the gold and ask for an extension of the loan. Earlier, borrowers could repledge the jewellery on the same day by paying only the interest. The change has made it costlier for borrowers, as they will have to borrow again to repledge the loan and extend the loan tenure for another year. “We are now asking gold loan borrowers to repay the full amount and close the loan before giving any extension. We have got instructions,” said the manager of a private bank.
Moreover, banks will re-appraise the gold to reconfirm its purity, and borrowers may be slapped with a processing fee, making it costlier for them. This has left many borrowers feeling trapped, with no easy way out. Earlier borrowers could redeem and repledge the jewellery on the same day by paying only the interest.
Why rules were revised
“Some banks are giving overdraft facility for a day to gold loan borrowers to enable them repay the principal and interest while renewing the tenure. When the gold is repledged, the amount is returned to the bank next day… it’s a book entry,” said a banking source.
The changes in gold loans have come after banks and NBFCs reported a phenomenal growth in gold loan outstanding to Rs 1.78 lakh crore as of January 2025, a surge of 76.9 per cent on a year-on-year basis. With gold prices shooting up, gold loan business has grown rapidly. Banks and NBFCs found it an attractive business since they can auction gold if the borrower defaults on the loan.
“The old provision was useful in renewing the gold loan at a minimal cost. Now poor people will no choice but to borrow money again to extend the tenure by repledging. They usually pledge the gold to raise money for household expenses, education and health costs,” said a financial sector source. “They will now be forced to borrow money to settle the loan at the end of the tenure before repledging again. Most (borrowers) are unlikely to get any overdraft facility.”
“The new system has made it difficult for us as we will have to borrow again to continue the loan for one more year. On top of this, we may have to pay up the processing fee again and the bank is supposed to appraise the gold before renewing the loan. This is a heavy burden. I was forced to undergo all these things,” Joseph said.
“New requirement of banks are forcing gold loan borrowers to repay and repledge at term end is unfair. Just let us pay interest… why add this burden to the middle class,” another borrower said in a post in social media platform X.
The RBI, which conducted a review of gold loan practices, found several irregular practices in gold loan activity. The major deficiencies include shortcomings in the use of third parties for sourcing and appraisal of loans, valuation of gold without the presence of the customer, inadequate due diligence and lack of end-use monitoring of gold loans, lack of transparency during auction of gold ornaments and jewellery on default by the customer, weaknesses in monitoring of LTV (loan-to-value) ratio and incorrect application of risk weights.
The RBI then asked banks and NBFCs to comprehensively review their policies, processes and practices on gold loans to identify gaps and initiate appropriate remedial measures in a timebound manner.
Further, the gold loan portfolio should be closely monitored, especially in the light of significant growth in the portfolio in certain SEs.
It should also be ensured that adequate controls are in place over outsourced activities and third-party service providers, the RBI said.
Earlier, borrowers could repledge the jewellery on the same day by paying only the gold loan interest. The rule change has made it costlier for borrowers, as they will have to borrow again to repledge the loan and extend its tenure for another year (Archives) 
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