The Reserve Bank of India (RBI) is introducing new rules for gold loans.
RBI Governor Sanjay Malhotra announced this change on April 9 during the monetary policy presentation. The news caused gold loan company stocks to fall by up to 10%.
This has left many gold loan customers wondering whether it will become harder to get a gold loan and if banks and companies will become more reluctant to offer them.
Will Gold Loan Customers Face Difficulty?
RBI Governor Sanjay Malhotra assured that the new gold loan rules would address flaws in the existing system but would not make it harder for customers to get gold loans.
In fact, the changes might lead to more interest from banks and gold loan companies in offering loans.
How Does the Gold Loan Process Work?
Malhotra explained that the central bank plans to make the gold loan rules stricter. To understand this, it’s important to know how gold loans work.
Customers pledge their gold—such as jewelry or coins—at gold loan companies or banks to get a loan. The loan amount is typically up to 75% of the value of the gold.
The customer repays the loan in EMIs, which includes the interest.
Some companies also offer a lump-sum repayment option where the entire loan and interest are paid back at once.
Gold Loan Interest Rates
Currently, interest rates for gold loans range from 9% to 27%. Banks generally charge lower interest than gold loan companies.
Since the loan is backed by the value of gold, there is less risk for the banks and gold loan companies.
If the borrower can’t repay, the gold is sold to recover the loan, making this business model profitable.
Why Are Gold Loans Becoming More Popular?
In recent years, both government and private banks have shown more interest in offering gold loans.
This is because gold loans are a safe and profitable source of income, as there’s minimal risk involved.
Previously, gold loan companies had a monopoly on the market, but now banks are also entering the gold loan business.
When Will the New Gold Loan Rules Be Implemented?
RBI will first release a draft of the new gold loan rules and seek feedback from the public and experts. Once feedback is received, the final rules will be implemented.
This process will take time, so customers shouldn’t expect immediate changes to the gold loan process.
Why Is RBI Changing the Rules?
Currently, there are different rules for banks and gold loan companies offering gold loans. RBI wants to standardize these rules to create a level playing field.
The central bank also identified several issues with how gold loans are given. Some banks and companies rush to approve loans without properly checking the background of the customer.
What’s Wrong with the Current Gold Loan Rules?
At present, banks and gold loan companies do not follow the same loan-to-value (LTV) ratio for gold loans.
Some gold loan companies also use fintech agents and third-party services to store the pledged gold, which RBI believes is not ideal.
Additionally, RBI has found flaws in how these companies auction gold jewelry when a loan is not repaid, which can put customers at risk.
