Golden Rules, New Risks: Decoding RBI's Framework for Gold & Silver Collateral

[Madhvendra Jha is a B.A. LL.B. (Hons.) student at Dr. Ram Manohar Lohiya National Law University, Lucknow]

Introduction

“Gold is money. Everything else is credit.”

     – J. P. Morgan

Gold and Silver have long been an integral part of our Indian culture and economy, symbolising wealth, status, and good fortune. Marking a shift in the treatment of these traditional assets in the financial system, the Reserve Bank of India (RBI) on June 6, 2025, released the final directions regarding the restricting lending against primary gold and silver (like bullion and bars) and related financial assets (such as gold bonds, gold mutual funds and digital gold/silver). However, it allowed regulated entities (REs), such as commercial banks, Non-Banking Financial Companies (NBFCs), and co-operative banks, to grant loans against collateral of gold jewellery, ornaments, and coins.

The key objectives behind this regulation are to create a uniform framework, previously scattered across numerous circulars, address problematic lending practices, and strengthen ethical and operational conduct. While having its advantages, it may lead to a rise in unorganised gold lending and can curb FinTech innovation in the long run.

As India has recently surpassed China by being the world’s largest gold consumer in 2024, it has become imperative to analyse this development.

Deep Dive into the Regulatory Framework

RBI has instructed REs to implement these guidelines by April 1, 2026, providing them a 10-month period to adjust systems and frameworks. Sanctioned loans before the adoption of RE will follow the previous statutes. To enhance financial stability, gold-backed loans are distinctly classified into two categories:

●“Income Generating Loan” means loans extended for the purpose of productive economic activities, such as farm credit, loans for business or commercial purposes, loans for creation or acquisition of productive assets, etc.

●"Consumption Loan" means any permissible loan that does not fit the definition of an income-generating loan.

This classification facilitates targeted credit allocation by directing funds toward income-generating activities, where borrowers are more likely to repay using the income derived from the loan itself. At the same time, it enforces stricter prudential norms on potentially riskier, consumption-oriented borrowing, which is non-productive in nature.

Collateral Clarity and Lending Limits

Extending loans is restricted when there is unclear ownership of collateral. A declaration or other document is mandatory to prove rightful ownership. Close examination through the anti-money laundering (AML) framework is required during multiple sanctions of loans to the same borrower. Prudential limits on gold and silver collateral are instituted to reduce concentration by capping permissible loan amounts at 1 kilogram for gold ornaments, 10 kilograms for silver ornaments, 50 grams for gold coins, and 500 grams for silver coins per borrower. The tenor of bullet repayment consumption loans shall not exceed 12 months, whereas no such ceiling is mentioned for income-generating loans.

Purity-Based Valuation Norms

The accepted collateral value must be based on its actual purity (caratage), using the lower of the 30-day average or the previous day's price. Only the metal's intrinsic value is considered, excluding gems or other additions.

LTV Caps for Prudence

To reduce overleveraging, the RBI has introduced tiered Loan-to-Value (LTV) caps based on loan size that must be maintained on an ongoing basis throughout the tenure of the loan.

Total Loan amount per borrower	Maximum LTV Ratio
Up to ₹2.5 lakh	85%
₹2.5–5 lakh	80%
Above ₹5 lakh	75%

Standardised Assaying and Documentation Protocols

Lenders must implement a standardised procedure for assaying, valuing, and documentation for collateral across all branches. Lenders must publish valuation methods online. A certificate/e-certificate is mandated at the time of acceptance, detailing the purity, weight, damage (if any), image, and value of the collateral. The loan agreement must clearly outline collateral details, valuation, charges, and repayment terms, with signed copies provided to both borrower and lender for transparency. All borrower communication must be in the regional language or the chosen language, whereas illiterate borrowers must be explained the terms in the presence of an independent witness.

Secure Storage and Collateral Protection

The lender’s employees must only store collateral in secure vaults at branches with proper infrastructure and security. Movement of collateral between branches is permitted only in specific cases. Lenders should regularly review storage systems, train staff, and conduct internal audits, while surprise verifications must be performed and recorded with borrower consent. Any collateral loss or damage must be recorded, disclosed, and compensated by the lender, including repair costs if it occurs during the loan period. While these safeguards are vital for borrower protection, they impose significant operational costs. Large banks may manage these requirements more easily, but smaller NBFCs, particularly those in rural areas, could face serious financial and logistical challenges.

Collateral Return and Auction Norms

Pledged collateral should be returned to the borrower (or legal heirs) within seven working days, failing which compensation of ₹5,000 per day is payable. Collateral unclaimed for two years requires board review. Auctions must be conducted transparently by trained personnel or empanelled auctioneers, with a reserve price of at least 90% of market value (85% after two failed attempts). Lenders and affiliates are barred from bidding. Misleading advertisements are prohibited, and loan disbursals must follow KYC norms and be made directly to the borrower’s bank account.

Key Challenges Ahead

While these measures are essential for enforcing compliance, ensuring security, and enhancing inclusivity, they also raise some concerns that could negatively impact the gold lending industry.

Rise in Informal Lending

According to a KPMG report, the unorganised sector captures nearly 63% of the Indian gold loan market and charges as high as 26% - 50% interest to borrowers compared to 10% - 20% interest levied by formal institutions. Almost three-quarters of the gold lending takes place in rural and semi-urban areas with less financial literacy and limited choice, which may result in a risk of fraudulent activities. On the one hand, these measures promote regional language and enable illiterates to take loans; on the other hand, they put restrictions like 12 months for bullet repayment and lower LTVs. Rural borrowers often don't have verified proof of their ornaments (especially in inherited cases), making it difficult to establish ownership. These scenarios will attract them to their local lenders, who don't come under any regulatory oversight, and may cause a rise in exploitative recovery practices.

Curbs FinTech Innovation

Recently, there has been a significant increase in interest among youth regarding products like sovereign gold bonds, digital gold, gold exchange-traded funds (ETFs), and gold savings schemes. Purchasing physical gold comes with various issues like storage difficulties and additional making charges; digital gold offers similar exposure to gold prices without these issues. Restricting the use of such products as collateral will reduce their charm and financial utility among investors. RBI guidelines may create hurdles in innovation by Fintech startups and NBFCs working on investment tools like the tokenisation of gold through blockchain (a $1 billion industry worldwide), which could have democratised access to gold loans as seen in countries like Hong Kong. Gold-based securitisation will also be hampered due to the availability of a less varied asset pool.

More Operational Burden

Banks and NBFCs must incur higher compliance costs while adopting RBI measures such as standardised documentation, staff training, and conducting various audits. Implementing these procedures will almost double documentation and valuation costs from 2% of the loan value to nearly 4-5%. It may also lead to a rise in the price of litigation arising out of borrower disputes and regulatory complaints, causing more trouble for lenders.  For smaller lenders, especially those with limited infrastructure, this added burden could divert their focus from core lending functions. They may either withdraw from offering gold loans or transfer the added costs to borrowers. Such outcomes risk defeating the RBI’s broader objective of enhancing credit accessibility.

Policy Suggestions and Way Forward

With India’s gold loan market surging 71% and set to exceed ₹15 lakh crore by 2027, the watchdog must address key concerns to ensure balanced growth.

According to Muthoot Finance, nearly 70% of gold loans are under ₹2 lakh, with an average ticket size of ₹88,000. This highlights the need to differentiate regulatory treatment based on borrower profile and loan size. The RBI should relax compliance norms for small-ticket and rural gold loans to prevent borrowers out of the formal sector. NABARD and Regional Rural Banks (RRBs) should collaborate to promote awareness and uptake of formal gold loans among agricultural and rural borrowers. RBI should introduce simplified ownership verification tools for rural borrowers and incentive-based participation models for rural banks.

Special focus should be given to eastern and northeastern India, where formal lending penetration remains limited compared to South India, which accounts for nearly 40% of the country’s gold lending market.

FinTechs and NBFCs should be encouraged to pilot alternate models through the RBI’s sandbox initiative, especially for innovations in blockchain-based tokenised lending and digital gold-backed instruments. Allowing limited collateralisation of digital gold and related products is needed while carefully regulating to prevent misuse.

A one-size-fits-all framework may harm the very sections it intends to protect. A step-by-step approach based on risk can better balance strict rules with the need to include more people in the formal lending system. An inclusive, risk-calibrated framework can safeguard borrowers, support innovation, and ensure gold lending grows responsibly within the formal financial system.