RBI’s Draft Guidelines: A New Framework for Gold Loans and Co-Lending

The Reserve Bank of India (RBI) has released draft guidelines that propose significant changes to the gold loan segment and co-lending arrangements. These revisions aim to standardize lending practices, strengthen risk controls, and broaden credit access—especially for smaller businesses. Here’s a breakdown of the key proposals:

Gold Loan Regulations: Key Provisions

• Loan-to-Value (LTV) Cap:
  All lenders, including NBFCs, must maintain a maximum LTV ratio of 75% for gold loans.
• Policy Integration:
  Gold loan norms must be embedded within lenders’ internal credit policies. This includes:
  • Exposure limits for borrowers
  • Monitoring end-use of funds
  • Restrictions on loans backed by primary gold or gold-related financial assets
  • No lending where the ownership of collateral is uncertain

LTV Ratio & Ongoing Compliance

• Tenure-Wide Monitoring:
  The 75% LTV ceiling must be upheld throughout the loan’s duration.
• Penalty for Breach:
  Exceeding the LTV cap will trigger an additional 1% provisioning requirement.
• Branch-Level Consistency:
  Lenders must ensure uniform assessment of gold weight and purity across all branches.
• Use-Based Categorization:
  Distinction must be made between loans used for income generation and consumption.

Broadened Co-Lending Scope

• Beyond Priority Sector Lending (PSL):
  Co-lending arrangements are no longer limited to PSL. Banks and NBFCs can now:
  • Collaborate on non-PSL loans
  • Reach micro and small enterprises typically underserved by banks
• Improved Access to Finance:
  This move is expected to expand credit channels for local businesses, supporting inclusive growth.

Revised Credit Enhancement Norms

• Capital Relief:
  Regulated entities will benefit from relaxed capital requirements for credit enhancements.
• Increased Enhancement Cap:
  The permissible credit enhancement has been raised from 20% to 50% of the bond issue size.
• Use of Proceeds:
  Funds raised through enhanced bonds can now be used to:
  • Repay existing bank loans
  • Free up credit limits for new infrastructure projects

Impact of Gold Loans and Co-Lending on the Financial Sector

Standardization & Clarity:
These guidelines aim to bring greater transparency and uniformity to gold loan practices.

Risk Reduction:
Enhanced compliance measures will help reduce credit and collateral risk in gold-backed lending.

Boost for MSMEs:
Expanded co-lending options are set to improve financing opportunities for small enterprises, contributing to broader economic growth.

Market Outlook:
Analysts expect these changes to strengthen the overall lending ecosystem, paving the way for a more regulated and growth-friendly financial environment.