RBI To Set Stricter Gold Loan Processes, Says Sources

The Reserve Bank of India (RBI) is planning to make stricter regulations on gold loans, requiring lenders to strengthen their underwriting process, monitor the end-use of funds, and conduct stricter checks on borrowers. The move comes in the wake of the growth in gold loans far outpacing the growth in lending as a whole, raising questions about financial stability and lending ethics.

A Reuters news report states that the Reserve Bank of India (RBI) will make banks and non-banking finance companies (NBFCs) implement stricter controls, such as confirmations about the ownership of the gold as collateral. These would be checks against unethical practices in the business and view the lending process from the perspective of regulations.

Gold loans have grown 50 per cent since September 2024, far above the all-loans growth rate. Part of the reason is the tight central bank regulation of unsecured lending since loans against gold are a more acceptable option now. And with the record high price of gold, it is also a good option for a loan to be borrowed on gold.

But RBI is also careful about uncontrolled expansion in the sector. RBI would like to see that players follow a standard procedure and that growth in the gold loan segment is contained, said a person familiar with the regulator's thinking. The central bank also does not want unscrupulous business dealings shaking the financial stability.

In September 2024, RBI observed some anomalies in the gold loan segment and requested lenders to reconsider their lending activities. Audits for the past 12 to 16 months had highlighted loopholes in the method of sourcing loans, valuing them, and pricing them.

Among the major concerns is the role of fintech agents in gold loan transactions. Banks have outsourced basic activities such as collecting, safekeeping, and weighing gold to third-party fintech firms, activities that should be carried out by lenders themselves. Some lenders were also auctioning gold without prior reasonable notice to the borrowers who had defaulted.

To address these issues, the RBI is set to give level-playing field regulations to all lenders so that nobody can evade norms. This would mean stricter monitoring of gold auctions and requiring lenders to maintain receipts on utilization of borrowed funds.

The new rules will likely involve tighter borrower background checks so that gold loans are extended only against real collateral. There will also be more stringent end-use of funds mechanisms, reducing the risk of misuse.

Although the RBI has not issued any official statement yet, such regulatory measures are a follow-up on its objective of keeping the gold loan segment in check. With the rising demand for gold-backed loans, this move by the central bank tries to balance supply and risk-taking on a tightrope.