RBI’s Gold Loan Guidelines: Reform or Roadblock?

Vinu: Manu, what’s this big issue about RBI’s draft norms for gold loans? I read somewhere that it’s creating a lot of fuss.

Manu: That’s true, Vinu. The RBI has recently proposed draft norms for gold loans, especially those issued against high-value gold jewellery. These proposed norms are intended to tighten lending standards, but they’ve drawn a lot of criticism from politicians and sections of the industry.

Vinu: Why are politicians so worried about these gold loan rules?

Manu: Because these rules could hit the poor and marginalized who form the bulk of gold loan borrowers—people like small traders, fisherfolk, domestic workers, and homemakers. For many of them, gold is their only asset. When they need quick cash for emergencies, they pledge jewellery. If norms are tightened too much, it may reduce their access to credit.

Vinu: So what exactly has the RBI proposed in this draft?

Manu:

The key proposals are:

1. Revised LTV Norms – RBI wants to change how Loan-to-Value (LTV) is calculated. Instead of including stones or making charges, the loan should be given only on the pure gold content value.

Earlier, banks would give loans even on additional components. This move may reduce the loan amounts borrowers can get.

2. Purpose Restriction – Loans given against high-value jewellery should not be used for consumption purposes (like weddings or personal expenses). Instead, they should be restricted to productive use like businesses or farming.

3. Stricter Controls on Large Loans – For loans above a certain value, the RBI wants stricter KYC, valuation processes, documentation, and maybe even site visits.

Vinu: How has the political class reacted?

Manu: Political leaders, including Tamil Nadu Chief Minister M.K. Stalin, have written to the Finance Minister expressing concerns.

They say that the rules could severely affect the poor who rely on gold loans for daily sustenance and emergencies. Stalin argued that these norms might discriminate against the poor, as many do not have access to formal credit or income documentation.

Vinu: Are there any exceptions suggested?

Manu:

Yes, the suggestions include:

• Exempting smaller gold loans (up to ₹5 lakh) from stricter norms.

• Revising the norms to ensure that the poor are not penalized.

• Introducing tiered norms—meaning different rules for large and small loan amounts.

Vinu: What does the RBI aim to achieve with these norms?

Manu:

RBI wants to:

• Ensure better risk management.

• Make sure that loans are not misused for unproductive consumption.

• Ensure uniformity and reduce the risk of overvaluation of pledged assets.

But there’s a fine balance here. Critics argue that the move may push poor borrowers away from formal finance and into informal lenders.

Vinu: So what happens next?

Manu: These are still draft guidelines. The RBI has invited public and institutional feedback. Once they evaluate the inputs, they will come up with final guidelines.

Vinu: Thanks, Manu. Now I understand why there’s so much debate over this.

Manu: You’re welcome, Vinu. It’s a classic case of balancing regulatory discipline with financial inclusion.

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