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Kolkata: As the price of gold balloons -- it has already touched the psychological level of Rs 1.2 lakh per 10 gms -- the stake of the participants in the gold loan ecosystem rise. In this climate, Reserve Bank of India has tweaked gold loan regulations with the target of improving transparency and protecting borrowers. Therefore, it is necessary that people should be aware of these.
Perhaps the most important point is that there have been curbs on institutional lending to those desirous of buying gold. The new rules prohibit any institution -- bank or NBFC (non-banking financial company) from providing loans to anyone for purchasing of gold in any form -- jewellery, coins, bars, ETFs or even gold-backed funds.
RBI is also enlarging the scope for gold loans. For example, working capital loans can be obtained by all entrepreneurs who use gold or silver as raw materials. The scope has been expanded beyond jewelers too. Also urban cooperative banks can now offer loans which are backed by bullion. This applies even for urban cooperative banks in Tier-III, Tier-IV cities. Basically, lending against gold has become wider and easier.
By the way, from the first day of the next financial year (April 1, 2026), the loan-to-value ratio for gold follows a graded approach now. It is 85% for loans up to Rs 2.5 lakh; 80% for loans between Rs 2.5 lakh to Rs 5 lakh and 75% for loan amounts in excess of Rs 5 lakh. With the price of gold rising continuously, now one has to pawn a smaller quantity of gold to obtain the same amount of money compared to what he/she would have to pledge a few months ago, or at the beginning of this year. Also, bullet repayment loans will require that the borrower must repay principal and interest within 12 months.
Once a consumer repays a gold loan completely, the lending institution returns the pledged gold. Now lenders have to return the pledged gold in a maximum time period of seven working days. Every single day of delay in returning the gold will make the lender pay the borrower Rs 5,000 for each day of delay.
Those who take gold metal loans have to repay within 270 days. A gold metal loan is usually taken by jewellery manufacturers. They borrow gold from a bank and not cash as most companies do as their working capital. But the repayment takes place in rupees which is supposed to be done from the proceeds of sale of the jewellery.
It has also been informed by the RBI that from April 1, 2026, the valuation of gold will be done on the lower of the previous day’s price or a 30-day average. This will not include charges of any valuable stone attached to the jewellery and the making charges of the piece of jewellery. Also when a loan agreement is drawn up, it must mention valuation methods, collateral details, repayment terms and rules governing auction. If a bank or NBFC has to auction pedged gold, it has to send an advance notice to the borrower. Also the reserve price for auction has to be set at 90% of the market value and if a couple of auctions fail the price may be marked down to 85%. If the auction generates a higher value compared to what the lender will get, the excess procceds from the auction must be handed over to the borrower in seven days.
Also the paperwork must be done in a language which is intelligible to the borrower. If the borrower is not able to read or write, the terms of the loan and repayment and auction must be explained lucidly to him/her with an independent witness at the spot.
