RBI plans stricter rules for gold loans amid rapid growth | Fusion - WeRIndia

The Reserve Bank of India (RBI) is planning to introduce tighter regulations on gold-backed loans to ensure financial stability and ethical lending practices.

The central bank aims to strengthen underwriting standards, closely monitor how the borrowed money is used, and ensure lenders follow uniform procedures.

Gold loans have surged by nearly 50% since September 2024, significantly outpacing the growth of other loan categories.

This increase is partly due to the RBI’s crackdown on unsecured loans, leading more borrowers to pledge gold for credit.

India is the second-largest consumer of gold, where people traditionally purchase gold for festivals, weddings, and investments.

With gold prices at record highs, using gold as collateral for loans has become an attractive financial option.

However, the rapid expansion of this sector has raised concerns about irregularities in lending practices, prompting the RBI to take action.

Major Concerns in Gold Lending

• Lack of Uniform Standards: Not all banks and NBFCs follow standardized procedures while processing gold loans.
• Weak Ownership Verification: Some lenders fail to properly verify the ownership of the gold pledged as collateral.
• Use of Third-Party Fintech Firms: Many banks and NBFCs rely on fintech agents for collecting, weighing, and storing gold, despite regulations stating that lenders should handle these tasks directly.
• Unethical Auctions: Some lenders auction pledged gold without notifying borrowers, leading to disputes and financial distress.

RBI’s Response and Future Regulations

Over the past 12 to 16 months, the RBI has conducted detailed audits of gold loan portfolios and identified multiple irregularities.

The central bank has found that loan sourcing, valuation, and compliance measures differ across institutions, creating loopholes in the system.

To address these concerns, the RBI plans to introduce stricter guidelines for both banks and non-banking financial companies (NBFCs).

These rules will enforce better borrower verification, uniform lending practices, and ethical gold auctions.

By tightening regulations, the RBI aims to balance financial sector growth while ensuring borrower protection and maintaining transparency in the gold loan market.

Image from Pxhere (Free for commercial use / CC0 Public Domain)

Image Published on February 22, 2017

Image Reference: https://pxhere.com/en/photo/804212