Explained: How RBI’s New Gold Loan Rules Will Reshape Lending in India
India’s gold loan industry — a crucial pillar in the country’s credit ecosystem — is on the brink of a significant transformation. Earlier this month, the Reserve Bank of India (RBI) issued new regulatory guidelines aimed at overhauling the way lenders assess and disburse gold-backed loans. These changes are expected to particularly impact non-banking financial companies (NBFCs), which dominate this segment of the market.
The Key Change: From Collateral-Based to Cash Flow-Based Assessment
At the heart of the RBI’s new directive is a shift from collateral-focused lending to cash flow-based credit assessment. Until now, lenders — especially NBFCs — have primarily relied on the market value of gold to determine a borrower’s loan eligibility. However, under the new norms, lenders must assess whether the borrower has the ability to repay, based on verifiable income or stable cash flows.
This is a marked departure from the traditional model, which made gold loans accessible to a vast population lacking formal income documentation, especially in rural and semi-urban areas. While the RBI’s intent is to instill more discipline and reduce credit risk, the shift adds layers of complexity to the disbursal process.
Stricter Loan-to-Value (LTV) Monitoring
Another major change is the tightening of Loan-to-Value (LTV) ratios. Lenders will now be required to include the interest component when calculating LTV, which could reduce the actual amount of loan disbursed against the same quantity of gold. For instance, a borrower who could earlier get a loan of up to 75% of the gold’s value might now be eligible for a lower amount when interest is factored in.
This change is expected to shrink the average ticket size of loans and may discourage some borrowers who depend on high-value loans during times of financial distress.
Industry Response and Challenges Ahead
According to Shinoy Varghese, credit analyst at S&P Global Ratings, the transition comes with upfront challenges. “Finance companies face upfront costs as they shift to a cash flow-based assessment of the borrower’s creditworthiness,” he said. NBFCs, in particular, will need to develop new systems, retrain staff, and perhaps even redesign loan products to meet the new compliance requirements.
While the RBI has granted lenders time until April 1, 2026 to fully implement the changes, the path ahead is not without hurdles. Many NBFCs rely on gold loans for a substantial portion of their revenue, and adapting their operations will involve both financial and logistical adjustments.
Broader Impact and Regulatory Intent
The RBI’s move is driven by the need to enhance prudence, transparency, and sustainability in a sector that has grown rapidly over the last decade. Gold loans, while easy to disburse and secure due to their collateralised nature, carry inherent risks — especially if lenders fail to account for a borrower’s repayment capacity or if gold prices become volatile.
Additionally, the shift toward income-based assessments may push some borrowers — particularly those in the informal sector — towards unregulated sources of credit, unless NBFCs find innovative ways to assess creditworthiness beyond formal documentation.
A Transformative Era
Experts believe this is the beginning of a transformative phase for the gold loan market. The changes may slow loan growth in the short term but are expected to build a more resilient and transparent ecosystem over time. Lenders will need to strike a careful balance between compliance, customer accessibility, and risk management.
As the sector adapts, innovation will be key — from building alternative credit scoring models to launching new loan structures tailored for diverse borrower profiles. The RBI’s move may be disruptive now, but in the long run, it aims to make India’s gold loan market more robust and future-ready.
IT.
