India’s central bank is making it easier for small borrowers to access funds against gold, tweaking a key rule in favor of low-ticket loans. But it’s not a free pass.
The Reserve Bank of India (RBI) on Friday said it will raise the loan-to-value (LTV) ratio on gold loans up to ₹2.5 lakh from 75% to 85%. Governor Sanjay Malhotra announced the move, calling it a “measured relaxation” that will still keep borrower risk in check. Importantly, the RBI will now require that both principal and interest be factored into the LTV calculation — a big shift from current practice.
What Changes for Borrowers and Lenders
Until now, banks and NBFCs could lend up to 75% of the value of pledged gold — but only calculated on the principal. That means interest was charged over and above, often tipping the real exposure above that threshold.
This new rule flips that a bit. While the LTV cap is rising to 85%, it’s a tighter leash in some ways because it brings interest into the equation.
For example, a borrower pledging gold worth ₹1 lakh could earlier borrow ₹75,000, and interest was added later. Now, if the interest adds up to ₹10,000 over the loan term, the principal can only be ₹75,000 to stay within the 85% cap.
Banks will need to adjust. And quickly.
Why This Matters Right Now
This tweak isn’t just a regulatory fine print — it could impact millions. Small-ticket gold loans are a lifeline for rural and semi-urban borrowers, especially when incomes are uneven and documentation is thin.
The RBI knows that. That’s partly why this move is limited to loans under ₹2.5 lakh. In other words, it’s targeting exactly the borrower who needs flexibility most — farmers, small traders, homemakers. The idea is to make borrowing a little less punishing, without letting the rope go slack.
It’s also a way for the RBI to tighten screws on an increasingly opaque industry, especially with NBFCs and fintechs entering the gold loan game aggressively.
RBI Balancing Act: Flexibility vs. Risk
Governor Malhotra didn’t mince words. While announcing the move, he clarified it comes with “riders.”
That’s code for: don’t treat this like a free-for-all.
There’s been concern that gold loans — especially the quick, app-based versions — are being disbursed too easily, without proper checks. Some lenders don’t even evaluate borrower income or repayment capacity properly. The increased LTV cap could become a slippery slope if not managed right.
So the RBI is stepping in with a measured approach:
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Higher LTV only for loans below ₹2.5 lakh
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Mandatory inclusion of interest in LTV calculation
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Continued oversight on non-bank lenders
It’s not a license to go wild. It’s a tweak. One that comes with strings attached.
Who Wins and Who Adjusts
For borrowers, it’s simple: more money upfront, especially helpful in a cash crunch. But they’ll need to stay alert to ensure they don’t cross the LTV limit due to interest buildup.
For lenders, particularly banks and NBFCs, the change means recalibrating internal loan processing systems. Many currently focus on principal-only calculations — that won’t fly anymore.
Here’s how it breaks down:
| Segment | Impact of New LTV Rule |
|---|---|
| Rural Borrowers | Easier access to funds, better liquidity in emergencies |
| Banks | Need to update LTV models, include interest in calculation |
| NBFCs/Fintechs | Will face tighter regulation, could slow aggressive growth |
| Pawn Brokers | Slight competitive edge loss as formal players expand reach |
One banker with a large public sector bank said, “We welcome the move. But it will require software upgrades and re-training our loan officers, especially in tier-2 and tier-3 locations.”
Not the First Time RBI Tweaked LTV
This isn’t uncharted territory. Back in 2020, during the pandemic, the RBI temporarily raised the LTV cap to 90% to ease liquidity stress. That move, though, had a sunset clause. It was rolled back in March 2021, citing concerns of overheating.
This time, the jump is modest — from 75% to 85% — and it’s targeted. But the RBI hasn’t said how long it will last or if it’s permanent. There’s no clarity yet on implementation timelines, though sources say it may come into force later this quarter.
That keeps things slightly foggy for now.
Is This Enough to Tame the Gold Loan Wild West?
Honestly? Not entirely.
While this is a welcome move for consumers, industry insiders say it won’t address the larger issues plaguing gold loans — like valuation inconsistencies, pushy recovery tactics by NBFCs, and lack of borrower awareness.
Plus, gold prices are volatile. A fall in gold rates can quickly throw LTV calculations out of whack, pushing borrowers into default territory. The RBI knows this, which is why it’s playing it safe by keeping the increase contained to 10%.
Still, it’s a step.
A senior analyst at CRISIL noted, “By capping the LTV at 85% and including interest, the RBI is trying to curb overleveraging while giving more breathing room to the needy borrower. It’s a fine line. We’ll know in a few months how it plays out on the ground.”
