On April 9th 2025, the Reserve Bank of India (“RBI”) published the comprehensive and consolidated draft Reserve Bank of India (Lending Against Gold Collateral) Directions, 2025 (“Directions”), as part of a move towards having a more regulated and principle-based framework, in a sector with a history of concerns over lack of harmony in lending practices.
The RBI had in-fact flagged several irregularities in the practices adopted by lending entities in its circular dated September 30, 2024, wherein it had identified major deficiencies, including: (a) shortcomings in use of third parties for sourcing and appraisal of loans; (b) valuation of gold without the presence of the customer; (c) inadequate due diligence and lack of end use monitoring of gold loans; (d) lack of transparency during auction of gold ornaments and jewellery on default by the customer; (e) weaknesses in monitoring of loan-to-collateral ratios; and (vi) incorrect application of risk-weights, etc.
With this backdrop, the RBI clarified that the regulatory objectives behind the new Directions are to harmonise the norms for loans against gold (and silver) collateral and these Directions are to be made applicable across various regulated entities (“REs”) – including Commercial Banks, Primary (Urban) Co-operative Banks (UCBs) & Rural Co-operative Banks, Non-Banking Finance Companies (NBFCs) and Housing Finance Companies (HFCs).
This article aims to provide an overview of what borrowers can soon expect from lenders of gold /silver loans upon adoption of the new Directions.
1. What types of gold and silver collateral are allowed?
The Directions clarify what is “eligible collateral’ with respect to gold and silver, which only includes:
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- jewellery;
- ornaments; and
- ‘specified coins’ (which are coins (22 carats or higher, for gold) sold by banks and coins sold by other entities will not qualify).
2. Is there a classification of loans basis end-use?
The Directions distinguish between types of loans, basis end-use, as either: (a) “Consumption Loans” which are non-commercial loans extended to individuals for personal needs such as, meeting medical/ emergency requirements, purchase of consumer goods and other similar requirements; and (b) “Income Generating Loans” which are commercial loans extended for undertaking productive business and economic activities.
In addition to general norms prescribed for both types of loans, the Directions prescribe specific norms for the granting of Income Generating Loans, such as, that, instead of considering the value of the collateral itself, the lenders must consider the credit requirement and cash flow likely to be generated through the proposed economic activity prior to granting the loan. Further, maintaining documentary evidence of end-use of the loan are mandatory for all income generating loans.
The Directions also cap the tenor of bullet repayment consumption gold loans (i.e., where the principal and interest are due for repayment in a single shot, only at the maturity of the loan) at 12 months for banks. Further, the loan amount has been capped at ₹5 lakhs per borrower for such bullet repayment loans by co-operative banks and regional rural banks.
3. Are there limits to how much can be borrowed against the offered collateral?
The construct of “Loan to Value (LTV) ratio” has been defined to mean the ratio of the outstanding loan amount (including interest), to, the value of the collateral security on a particular reference date.
Lenders are permitted to prescribe the LTV ratios for loans that may be sanctioned against eligible collateral based on their risk assessment, however the Directions have imposed certain restrictions on the LTV ratios for granting of the following types of loans:
- For consumption gold loans: The LTV ratio shall not exceed 75% of the value of gold. This LTV ceiling of 75% also applies to all gold loans sanctioned by NBFCs, regardless of the type of loan.
- For bullet repayment loans: LTV ratio must be calculated by assessing the total amount repayable by the borrower at maturity rather than the quantum of loan initially sanctioned.
The prescribed LTV ratios must also be maintained on an ongoing basis throughout the tenure of the loan.
4. Do lenders need to create any internal policy for granting loans?
The Directions require lenders to establish and adhere to a Credit/ Risk Management Policy (“Policy”), where such Policy must specifically address: borrower limits; mechanisms to ensure end-use; LTV ratios; valuation standards and norms; assaying procedures, the auction procedures (upon default), the trigger event for the auction of gold collateral, mode of auction, notice period allowed for settlement of loan before auction, empanelment of auctioneers, etc. The Policy must also detail the procedure to fix staff accountability for non-adherence to the Policy and the Directions.
5. Are there any limits to how much collateral can be given?
Loans against gold and/or silver ornaments and specified coins are capped as per the following limits:
- the aggregate weight of either gold or silver ornaments pledged shall not exceed 1Kg per borrower.
- the aggregate weight of specified coin(s) pledged shall not exceed 50 grams per borrower in case of gold coins, and 500 grams per borrower in case of silver coins.
6. What are the prescribed standards/ procedures for valuation and assaying of collateral?
Any gold accepted as collateral must be valued based on the price of 22 carat gold. If the gold offered as collateral is of purity less than 22 carats, the value must be translated into the equivalent of 22 carat purity. Further, lenders must establish a standardised procedure to assay the purity of gold collateral, uniformly, across all branches of the lender, and such procedures framed under the Policy must also be displayed on the website of the lenders for information of customers. Borrower(s) must also be present while assaying their gold at the time of sanctioning the loan.
7. What are the prescribed standards for gold loan documentation?
The loan agreement executed with borrowers, must be standardised across all branches of the lender, and should detail all key terms, including, the description and value of the collateral taken, the auction procedure (in the event of a default), the notice period provided to the borrower for repayment/ settlement of loan prior to the auction, timelines for release of the collateral upon full repayment/ settlement.
Additionally, lenders, while accepting the collateral, must issue a certificate/ e-certificate to be signed by both the lender and borrower, regarding details of the collateral, including, the purity (in carats), the weight of the gold collateral, an image of the collateral; and the value of collateral arrived at the time of sanction.
Given the nature of the sector, all communication with the borrower, must be in the language of the region or in a language as chosen by the borrower. And for illiterate borrowers, lenders must explain important terms and conditions to them in the presence of a witness.
8. What do lenders need to do to protect the pledged collateral?
Lenders must ensure that necessary infrastructure and facilities are put in place and appropriate security measures taken in each of their branches where loans are sanctioned against gold collateral, and that such collateral is handled only in their branches and only by their employees.
Restrictions are imposed on the physical transfer of collateral, and are permitted to be transported between lenders’ branches, only for pooling of gold collateral or shifting/ closure of branch(es) or for ‘exceptional reasons’ to be elucidated by the lender in their Policy.
Lenders are required to conduct internal audits, and can carry out periodic surprise verification of the gold collateral pledged with them.
9. How long does it take to release the collateral after repayment?
Lenders are obligated to release the collateral held as security to the borrower(s)/ legal heir(s) within 7 working days upon full repayment/ settlement of the loan.
10. Is there any compensation if the collateral is damaged?
In case of any damage to the gold collateral by the lender during the tenor of the loan, the cost of repair must be borne by the lender. Any delay, for reasons attributable to the lender, attract a compensation of ₹5,000 for each day of delay beyond the prescribed timeline, payable to the borrower(s)/ legal heir(s).
11. What happens to unclaimed collateral after repayment?
Any gold collateral lying with lenders beyond 2 years from the date of full repayment/ settlement of loan can be treated as unclaimed, however, lenders must periodically undertake special drives to ascertain the whereabouts of the borrower(s)/ legal heir(s) regarding such unclaimed collateral.
12. Are there any obligations on lenders for marketing gold loans?
Lenders are restrained from issuance of misleading advertisements containing unrealistic claims to promote their gold loan products and offerings. Moreover, lenders and their recovery agents must abide by the directions issued by the RBI on recovery-related conduct.
13. Do lenders have any disclosure obligations?
Lenders must also disclose, in the notes to accounts of their financial statements, the amount and percentage of loans extended against eligible gold collateral, separately for both income generating as well as consumption purposes, to their total assets as per the prescribed format. If they lend against eligible silver collateral, then a separate disclosure on similar lines shall be made for such lending.
Conclusion and implications
The RBI's Directions offer several benefits, including improved borrower protection, standardized practices, and a more transparent and fair system for the grant of gold loans. These Directions are a step forward in mitigating risk, addressing existing gaps, and enhancing the overall governance of the gold loan sector.
For borrowers, they can expect enhanced transparency, protection and fairer (yet timely) practices from lenders going forward due to the harmonised processes that need to be adopted by lenders.
For lenders, the additional regulations, though seemingly onerous, will unify and standardise their processes thereby improving the quality of internal governance over time, and also mitigate their own risks associated with valuation, repayments, and recovery.
Author: Mr. Joseph Mario Ritvik, Associate, NovoJuris Legal
