RBI may tighten underwriting for gold loans, enhancing borrower checks: Report

Gold loans: The Reserve Bank of India (RBI) is preparing to implement stricter underwriting standards for gold loans, urging both banks and non-bank financial institutions to enhance their background checks on borrowers. This initiative aims to ensure that financial entities adhere to standard protocols amidst a 50% rise in gold loans since September 2024, news agency Reuters reported quoting sources in the central bank.

Gold loans have emerged as a popular financial option for individuals in need of immediate funds. Unlike personal loans that often require extensive documentation and credit checks, gold loans provide a prompt solution as they are backed by the physical gold. Regulated by the Reserve Bank of India (RBI), these loans enable banks and Non-Banking Financial Companies (NBFCs) to lend up to 75% of the gold's current market value. For instance, if a gold asset is valued at Rs 1 lakh, a borrower can potentially secure a loan of up to Rs 75,000. However, the actual loan amount may vary depending on the lender's risk assessment.

RBI's scrutiny

The central bank's scrutiny of the gold loan industry follows discoveries of several irregular practices, prompting a comprehensive review of lending processes by lenders. The RBI has identified shortcomings in loan sourcing, appraisal, and gold valuation, with not all entities adhering to standardised rules. An official source confirmed: "Not all entities are following the standardised rules," highlighting the inconsistencies within the industry. This increased oversight aims to address these regulatory lapses and ensure uniform adherence to guidelines.

Recent audits by the RBI revealed irregularities, particularly in the portfolios of non-bank lenders, and stressed weaknesses in monitoring funds lent against gold. Additionally, fintech agents have been found undertaking tasks such as collecting, storing, and weighing gold—responsibilities traditionally managed by lenders. The RBI's focus is to ensure that these operations are conducted within regulatory frameworks to prevent misuse and maintain lender accountability. 

Further concerns have arisen regarding lenders auctioning gold without notifying borrowers who have defaulted. The RBI seeks to ensure that all lenders are treated uniformly to prevent any entity from bypassing regulations, especially concerning gold auctions and monitoring the use of loaned funds. By doing so, the central bank aims to protect borrowers and strengthen the integrity of the lending process across the sector.

Gold loan and its growth

The banks' gold loan portfolio continued to exhibit strong growth, with a 76% year-on-year increase in January 2025. This growth was in contrast to the moderation seen in retail credit, particularly in the unsecured credit segment, following the rise in risk weights in November 2023.

In January 2024, the gold loan pool had grown by 17.4% year-on-year. According to RBI data, loans against gold jewellery in the retail segment amounted to Rs 1.78 lakh crore in the fortnight ending on January 24, 2024. From September 2024 onwards, the gold loan portfolio has consistently shown over 50% year-on-year growth each month.

However, the expansion of retail loans slowed down to 14.2% in January 2025, compared to 18.2% in January 2024. This deceleration can be attributed to the decrease in growth rates in other personal loans, vehicle loans, and credit card outstanding segments, as stated by the RBI in a recent statement. In particular, other personal loans, which include unsecured credit, saw a decline in growth from 20.8% to 9.2%.