The Reserve Bank of India (RBI) on Wednesday issued a draft circular proposing stronger norms for loans given against gold ornaments and jewellery.

The aim is to harmonise the rules across different regulated entities and address a “few concerns”, including breach of loan-to-value (LTV) ratios, varying auction policies and processes, and deviations in evaluating and certifying the pledged gold's purity and weight.

The RBI, in the policy conference, clarified that the intention is not to make the norms tighter. 

“To our mind there is no tightening, it is a rationalisation. It's broadly an extension of whatever, on the conduct side primarily, were the guidelines for NBFCs, those have been extended now to the banking sector also,” RBI Governor Sanjay Mahotra said.

Currently, different types of lenders like banks and non-banking financial companies (NBFCs) follow slightly different rules on gold loans. 

In an effort to lift the regulatory overhang on the segment, lenders will have to ensure that a uniform procedure is put in place across all branches for assessing the weight (gross as well as net) and purity of the gold being used as collateral and its weight.

Details of all procedures framed in terms of the policy shall be displayed on the website of the lenders for information of customers.

“Lenders shall ensure presence of the borrower(s) while assaying the collateral at the time of sanctioning the loan. The deductions relating to stone weight, fastenings, etc., as part of the assay procedure shall be explained to the borrower(s) and details incorporated in the certificate to be issued,” it said.

Additionally, lenders must regularly monitor the loan usage and keep evidence on regarding how borrowers are utilizing the funds provided.

The norms will seek to establish specific limits for single borrowers as well as sectoral caps on the gold loan portfolios of banks.

The RBI has also stipulated that lenders may only renew or increase gold loans if there is no stress on existing loans and if it falls within the loan-to-value limit.

Moreover, the central bank clarified that a single gold collateral cannot back multiple loans at the same time and has prohibited lenders from granting loans if the collateral has been re-pledged or if there are uncertainties regarding its ownership.

Borrowers can’t take concurrent loans for both consumption and income-generating purposes.

The loan agreement should cover the description of the gold collateral taken as security, value of the collateral, details of auction procedure and the circumstances leading to the auction of gold collateral, the notice period which should be allowed to the borrower for repayment/ settlement of loan before the auction is conducted, the circular said.

All communication with the borrower, especially the terms and conditions of the loan, or other important communication which affects the interest of the borrower or the lender, including a breach of the prescribed LTV ratio, shall be in the language of the region or in a language as chosen by the borrower, it said.

For illiterate borrowers, it said, lenders should explain important terms and conditions in the presence of a witness.

The norms will also apply to loans secured by silver jewellery, silver ornaments and specified silver coins “wherever lenders are permitted to extend loans against such collaterals,” the central bank said.

The regulator said it shall seek feedback on the norms by 12 May, 2025.