In a major development aimed at safeguarding small borrowers, the Department of Financial Services (DFS) under the Ministry of Finance has submitted its feedback on the Reserve Bank of India’s (RBI) draft directions regarding lending against gold collateral. The proposals are particularly focused on ensuring the smooth and timely disbursal of gold loans under ₹2 lakh, which form a significant part of the informal credit system in India.

The DFS reviewed the guidelines under the supervision of Union Finance Minister Nirmala Sitharaman and has recommended key relaxations and extensions that could significantly impact both lenders and small-ticket borrowers.

Key Recommendations by DFS

1. Exemption for Loans Below ₹2 Lakh
The foremost suggestion by the DFS is to exempt gold loans below ₹2 lakh from the scope of the new draft guidelines proposed by RBI. This move is targeted at ensuring that small borrowers, many of whom depend on gold loans for personal emergencies or micro-business needs, are not burdened by stricter regulations.

This is particularly significant because a large segment of rural and semi-urban India accesses funds through small-ticket gold loans. The DFS argues that imposing uniform regulatory constraints on such small borrowers could lead to delays and complexity, affecting credit access.

2. Extension of Implementation Timeline
Another crucial recommendation is that the new RBI norms should be implemented from January 1, 2026, instead of being enforced immediately. This extended timeline would give banks, NBFCs, and cooperative institutions ample time to realign their operational systems, retrain staff, and restructure internal processes.

The DFS believes that sudden implementation could disrupt the loan disbursal process and may reduce the pace of credit availability to those in urgent need.

RBI’s Draft Gold Loan Guidelines: A Background

The RBI’s proposed changes to the gold loan ecosystem were issued in April 2025, following a joint supervisory review that identified numerous irregularities across institutions.

The draft guidelines highlighted the following concerns:

• Excessive Loan-to-Value (LTV) ratios, often breaching regulatory thresholds

• Inadequate risk assessments and poor monitoring practices

• Unregulated third-party agents involved in recovery and valuation

• Opaque auction processes for recovering dues from defaulting borrowers

These findings prompted the RBI to draft a more structured and compliant framework for gold loan disbursement and recovery.

Major Provisions in the Draft Guidelines

1. Loan-to-Value (LTV) Ratio Regulation
One of the most critical changes in the draft is the mandatory maintenance of the 75% LTV ratio throughout the entire tenure of the loan, including the interest component. This is a shift from earlier practices where LTV was calculated at disbursal and not continuously monitored.

Such a rule may reduce the actual disbursed amount in bullet repayment loans from the current 65–68% of gold value to 55–60%, potentially affecting borrowers' access to larger credit amounts.

In contrast, EMI-based gold loans, where the principal is repaid periodically, could continue to offer slightly higher LTVs, thereby becoming a more preferred structure for banks.

2. Cap on Gold Loan Portfolio Share
Another significant draft provision mandates lenders to cap the percentage of gold loans in their total loan portfolios. This aims to prevent over-reliance on a single loan category and ensure better portfolio diversification.

The portfolio cap will be reviewed periodically, based on various indicators such as:

• Recovery efficiency

• Geographical concentration

• Overall capital adequacy

3. Auction Reforms
To tackle non-transparent practices, the RBI has proposed stringent auction guidelines. These include:

• Timely notification to borrowers before auction

• Independent valuations of gold pledged

• Transparent and traceable bidding processes

These measures aim to protect borrower rights and reduce the scope for fraud or under-valuation during asset liquidation.

Why These Norms Matter

India is one of the largest consumers of gold, and gold loans have traditionally been a go-to credit option for low-income and rural populations. With easier documentation and faster disbursement, gold loans play a critical role in financial inclusion.

However, the surge in gold prices over the years has led to higher LTVs, and in turn, higher credit risks for lenders. Misuse of the system by agents and lack of transparency have further worsened the situation, prompting regulatory tightening.

But applying the same strict rules to small borrowers, especially those under ₹2 lakh, may result in reduced credit availability, hence the DFS recommendation for exemption.

Stakeholder Reactions and the Road Ahead

While the RBI is currently reviewing all stakeholder feedback, including that from the DFS, industry experts believe that the regulator will need to strike a balance between risk control and financial inclusion.

Some NBFCs and cooperative banks, which specialize in gold loans, are already preparing for changes by modifying IT systems, risk monitoring tools, and loan products. Others are awaiting final clarity before investing in compliance upgrades.

If the exemption and deferral recommended by DFS are accepted, it would provide short-term relief to both lenders and small borrowers. It also offers RBI more time to ensure uniform adoption and better oversight mechanisms.

Conclusion: Striking the Balance Between Regulation and Access

The ongoing debate on gold loan guidelines underscores the importance of calibrated policymaking in a country as financially diverse as India. While the RBI’s intent to reduce systemic risk is well-founded, the DFS’s pitch for safeguarding small borrowers highlights the need for inclusive regulation.

As the RBI moves closer to finalising its directions, the decision to consider DFS inputs seriously could signal a balanced approach—ensuring risk mitigation without compromising credit flow to the most financially vulnerable segments.

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