Borrowers May Get Smaller Gold Loans as RBI Tightens Lending Norms

Borrowers who depend on gold loans could soon face tighter lending conditions and reduced disbursement amounts under the Reserve Bank of India’s (RBI) proposed regulatory changes. According to a May 6 report by CRISIL Ratings, the RBI’s draft guidelines, if implemented without changes, would significantly impact how NBFCs calculate loan-to-value (LTV) ratios and manage bullet repayment products.

The RBI has proposed that LTV be computed by including both the loan principal and accrued interest, which is a shift from the current practices followed by most gold-loan NBFCs. As a result, companies are expected to reduce the LTV at the time of disbursement to stay within the regulatory cap of 75 per cent throughout the loan tenure.

“For bullet loans, we expect the LTV at disbursement to reduce from 65-68 per cent currently to 55-60 per cent to factor in accrued interest and ensure LTV compliance,” said Malvika Bhotika, Director, CRISIL Ratings. 

“This will mean lower loan disbursement for the same value of gold jewellery,” she said.

This could mean borrowers get up to 15 per cent less for the same pledged gold, a notable hit for those using gold loans to cover urgent expenses or bridge liquidity gaps.

The CRISIL report, titled “Gold-loan NBFCs to slow if draft directions are implemented as is”, highlights that a new provisioning requirement will also come into play. Lenders will need to make an additional 1 per cent provision if the LTV breaches the 75 per cent limit based on mark-to-market valuation.

“The 1 per cent additional provisioning will be higher than the current provisioning on gross stage 1 loans. However, the impact is unlikely to be significant as most NBFCs focused on gold loans have healthy pre-provisioning profitability,” CRISIL noted.

In addition, the draft rules call for mandatory interest repayment before any bullet loan renewal or top-up. This could hinder borrowers who rely on rolling over their gold loans without servicing the interest component regularly.

“This is likely to create practical challenges at the borrower level and impede the ability of NBFCs to offer loan renewal/top-up in a seamless manner,” CRISIL said.

The proposed guidelines are part of the RBI’s broader response to concerns raised in 2024 about rapid growth and uneven practices in the gold loan segment. CRISIL pointed out that the overall gold loan portfolio surged more than 50 per cent in the last fiscal, with banks leading the growth at 104 per cent.

Other proposed measures include capping the tenure of bullet loans at 12 months, a standard already followed by most large NBFCs, and reinforcing the need to comply with income tax limits on cash transactions. CRISIL noted that clarifications may be required to determine how ‘receipt’ is defined, especially in rural markets where digital collections are still limited.

While the proposed regulations could disrupt current business models and borrower behaviour in the short term, CRISIL maintains that the long-term effect would be positive.

“The directions are expected to structurally strengthen the sector over time,” said Bhotika. “Ultimate losses are also likely to be in line with past trends due to strong risk management practices and timely auctions.”