Tighter RBI rules for gold loan collaterals: Here’s what you need to know

Values of gold bullion / ETFs can fluctuate rapidly, exposing lenders to potential losses, which explains the RBI's restrictions on lending against such assets.

The Reserve Bank of India (RBI) on June 6 announced final guidelines for lending against gold and silver assets.

Essentially, the banking regulator has prohibited banks and financial institutions from granting loans against gold bars (bullion) or financial assets backed by primary gold or silver, e.g., units of exchange-traded funds (ETFs) or units of mutual funds and digital gold.

This move aims to regulate the gold loan market and mitigate potential risks associated with lending against certain gold-backed financial instruments.

Volatility a cause for concern

Gold bullion and financial instruments like gold and silver ETFs, mutual fund units are highly volatile, subject to significant market fluctuations, and speculative in nature, making them inherently riskier assets. “Gold bullion or ETFs and gold jewelleries are different in genisys - its purpose and intent. Values of gold bullion / ETFs can fluctuate rapidly, exposing lenders to potential losses, which explains the RBI's restrictions on lending against such assets,” says Shaji Varghese, CEO, Muthoot FinCorp, a non-banking financial company (NBFC).

The objective is to curb credit risks. “Compared to gold jewellery, which has a more formal value and risk profile to lend, gold bars, silver, and financial instruments, such as gold ETFs and units of mutual funds, are harder to assess and monitor consistently,” says Puja Singh, CEO, Manipal Fintech, a gold loan platform. This move seems to be part of a wider effort to bring more clarity and control to asset-backed lending and limit potential exposure to lenders, she adds.

Double pledging risk increases with gold and silver ETFs because of the lack of a centralised registry, warns Lt Col Rochak Bakshi, Founder of True North Finance, a financial and investment planning firm.

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No impact on gold and silver ETF investments

RBI's move is more of a reinforcement of existing rules rather than a new restriction. “The RBI broadened the scope to include silver as an eligible security, while continuing to exclude gold ETFs and similar financial instruments as collateral,” says Varghese. Overall, he doesn't foresee significant disruption to existing lending practices, as this move largely clarifies and reaffirms current norms alongside harmonising the guidelines across the REs (regulated entities).

Singh notes that the loan restrictions on gold/silver ETFs or mutual funds won't impact investment flows, as investors typically buy these products for portfolio diversification, not for using them as loan collateral.

What does it mean for existing loans?

According to Bakshi, the RBI guideline states that loans sanctioned before April 1, 2026, will follow existing rules, which means that loans against gold bars, gold/silver ETFs, or mutual fund units issued before this date by a financial institution are likely grandfathered and can continue until maturity without requiring repayment or collateral switching.

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Exemptions to these restrictions

The RBI guidelines permit loans against gold jewelry, ornaments, and specially minted gold coins (22 carats or higher, sold by banks, up to 50 grams per borrower). Additionally, silver jewellery, ornaments, and specified silver coins (minimum 925 purity, sold by banks) are also allowed as collateral, giving borrowers more options.

Varghese says sovereign gold bonds (SGBs) are an exception, usable as collateral for loans. However, he notes that bank guidelines for SGB loans may differ, indicating that the terms and conditions for such loans can vary across lenders.

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RBI's gold loan rules: A trade-off between risk and inclusion

The move has its pros and cons, from the investors’ perspective. The objective is to mitigate volatility risk inherent to such products. However, Bakshi believes that excluding gold and silver ETFs and mutual fund units as collateral may limit options for investors, especially those holding digital gold, and could potentially reduce financial inclusion.