To temper sharp gold loan growth, RBI issues draft rules that tighten lending

Banks and NBFCs reported a sharp 77 per cent surge in gold loan outstanding to Rs 1.78 lakh crore as of January 2025. 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. Borrowers 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.

“In case the original receipts of purchase of gold collateral are not available, a suitable document/ declaration obtained from the borrower shall be prepared explaining how the ownership of the collateral has been determined. Pledge of gold collateral shall be subject to suspicious transaction reporting policy of the lender under relevant regulatory directions,” the RBI said, adding that the lenders should not extend loans against re-pledged gold collateral.

The norms said the lenders should put in place a ceiling on the loan portfolio secured by eligible gold collateral as a proportion of their total loans and advances, which should be reviewed periodically keeping in view the desired granularity, collection efficiency, realisation performance through auction route, availability of adequate economic capital and concentration risks.

Tenor of consumption loans in the nature of bullet repayment loans where both principal and interest become due at maturity should be capped at 12 months.

The RBI suggested that the bullet repayment loans by cooperative banks and regional rural banks (RRBs) will be subject to a maximum ceiling of Rs 5 lakh per borrower. Bullet repayment loans are loans where the principal is due for repayment at the maturity of the loan.

The RBI said that the maximum loan-to-value (LTV) ratio in respect of consumption gold loans should not exceed 75 per cent of the value of gold. The ceiling of 75 per cent will be applicable to all gold loans sanctioned by non-banking financial companies (NBFCs).

The RBI emphasised that the prescribed LTV ratio should be maintained on an ongoing basis throughout the tenor of the loan.

In case of a breach of regulatory LTV ratio, if the breach persists for more than 30 consecutive days, the entire outstanding amount shall attract an additional standard asset provisioning of 1 per cent. The provisioning shall revert to the normal levels only after the LTV ratio is brought within limits, and remains so for at least 30 days.

If the loan is in breach of LTV ratio as on the date of maturity, no renewal shall be permitted, the draft norms said.

The RBI proposed that lenders should ensure that a standardised procedure is put in place to assay the purity of gold collateral and its weight (gross as well as net). This procedure should be adopted uniformly across all branches of the lender.

The regulator also asked lenders to appoint qualified assayers/ valuers, who do not have any negative records in the past, for valuation of the gold collateral.

The norms also asked lender to ensure the presence of the borrower while assaying the collateral at the time of sanctioning the loan.

In terms of the auction process, the draft norms said that the lenders should implement a transparent auction procedure, which includes announcement of the auction to the public by issue of advertisements in at least two newspapers, one in the regional language and another in a national daily.

The RBI said that in case of any damage to the gold collateral by the lender during the tenor of loan, the cost of repair should be borne by the lender.

The guidelines proposed Lenders should not issue any misleading advertisements containing unrealistic claims to promote gold loan product.

RBI review flags irregularities in gold loan practices

The RBI, which conducted a review of gold loan practices, found several irregular practices in the 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. It should also be ensured that adequate controls are in place over outsourced activities and third-party service providers, the RBI said.