The Reserve Bank of India (RBI) has introduced a significant update to its gold loan regulations. Effective June 6, 2024, the central bank has barred all regulated entities — including banks and non-banking financial companies (NBFCs) — from extending loans against gold bars (bullion), gold or silver Exchange Traded Funds (ETFs), and mutual fund units backed by these metals.

This move is aimed at mitigating credit and market risks, especially those stemming from the volatility of these financial instruments, and streamlining the gold-backed lending market for better regulatory control.

Why the New Rule? Understanding the RBI’s Rationale

Volatility Is a Major Concern:
Gold and silver ETFs and mutual fund units are tied to market prices, which can fluctuate significantly over short periods. Unlike gold jewellery, which has relatively stable resale value, these instruments may expose lenders to sharp swings in value.

According to Shaji Varghese, CEO of Muthoot FinCorp, bullion and ETFs are fundamentally different from jewellery. “The values of gold bullion or ETFs can fluctuate rapidly, exposing lenders to potential losses,” he explains.

Puja Singh, CEO of Manipal Fintech, adds that asset-backed lending using volatile instruments makes it harder to assess or monitor the risk consistently. The guidelines, therefore, aim to enhance financial discipline and minimize systemic credit risks in the ecosystem.

Double Pledging Risks and Lack of Central Registry

One major risk flagged by experts is double pledging — the possibility of a borrower using the same ETF or digital gold to secure multiple loans due to the absence of a central registry.

Lt Col Rochak Bakshi, founder of True North Finance, emphasized that without a centralized tracking system for such assets, it’s difficult for institutions to detect fraudulent use or repetitive pledging of the same asset.

What Assets Are Still Eligible for Loans?

The RBI has made it clear that not all forms of gold and silver are banned as collateral. Under the new rules, the following assets remain eligible for use in securing loans:

• Gold jewellery and ornaments

• Specially minted gold coins sold by banks (22 carats or higher, up to 50 grams per borrower)

• Silver jewellery and ornaments

• Specified silver coins (minimum 925 purity, sold by banks)

• Sovereign Gold Bonds (SGBs), subject to individual bank lending policies

This gives both borrowers and lenders flexibility, especially those operating in the traditional jewellery market or investing in SGBs for long-term wealth planning.

No Impact on Investments in Gold and Silver ETFs

Although lending against gold and silver ETFs is no longer permitted, the RBI guidelines do not affect investment flows into these instruments.

According to Singh, most investors buy ETFs and mutual fund units for portfolio diversification, not as collateral for loans. Therefore, investment sentiment in these products is expected to remain stable.

Varghese also notes that the RBI’s move is a clarification and harmonisation of existing practices, rather than a new regulation. The regulator has simply expanded the rule set to include silver, ensuring a more uniform application of lending standards across asset classes.

Loans Sanctioned Before April 1, 2026: What Happens Now?

The grandfathering clause within the new guidelines offers relief for existing borrowers and lenders.

As per Bakshi, loans granted before April 1, 2026, against gold bars, gold/silver ETFs, or mutual funds, will remain valid until maturity. There will be no requirement for early repayment or switching the collateral to another approved asset class.

This provides continuity for financial institutions and protects customers who entered loan agreements under previous guidelines.

Sovereign Gold Bonds (SGBs): A Viable Exception

Among financial gold instruments, SGBs stand out as an exception. The RBI continues to allow SGBs as valid loan collateral.

However, Varghese cautions that banks may have different internal guidelines regarding lending against SGBs. This means terms may vary from lender to lender, even if the central bank permits such collateral.

This exemption reflects the secure and sovereign-backed nature of SGBs, offering confidence to lenders while providing a regulated investment opportunity for retail investors.

Digital Gold Investors May Face Inclusion Challenges

One notable impact of the RBI directive is on holders of digital gold. These instruments, while convenient and easily accessible, fall under the restricted category for lending.

According to Bakshi, the move, though focused on risk mitigation, may also result in reduced financial inclusion. Investors who use digital gold as a wealth-building tool may now find it harder to unlock liquidity from these holdings through formal banking channels.

This creates a trade-off — improved systemic safety for lenders, but reduced flexibility and utility for some classes of investors.

Clarity, Stability, and Regulatory Evolution

While some may see the move as restrictive, regulatory clarity can also foster stability and investor confidence in the long term.

By drawing clear boundaries between eligible and non-eligible collateral, the RBI aims to streamline the gold loan market and reduce ambiguities that could be exploited.

Over time, as digital gold infrastructure matures and centralised registries come into play, the regulatory stance could evolve further to include more digital assets in a secure manner.

Conclusion: A Balancing Act Between Risk and Opportunity

The RBI’s decision to prohibit loans against gold bars, ETFs, and mutual fund units backed by gold or silver is rooted in the intent to safeguard India’s financial system from volatile and poorly tracked instruments.

While it may limit options for investors who treat these instruments as collateral tools, it also protects lenders from undue risk, thereby ensuring long-term financial stability and inclusion through safer channels like SGBs, jewellery, and ornaments.

Going forward, industry players and regulators may need to collaborate in developing secure mechanisms for digital gold verification and pledge management, potentially revisiting these rules as the ecosystem matures.

The Upcoming IPOs in this week and coming weeks are Eppeltone Engineers, Aten Papers & Foam, Patil Automation, Oswal Pumps, Samay Projects Services, Monolithisch India.

The Current active IPO are Jainik Power Cables, Sacheerome Limited.

Start your Stock Market Journey and Apply in IPO by Opening Free Demat Account in Choice Broking FinX.

Join our Trading with CA Abhay Telegram Channel for regular Stock Market Trading and Investment Calls by CA Abhay Varn - SEBI Registered Research Analyst.