In a significant policy development, RBI Governor Sanjay Malhotra announced that the Reserve Bank of India will soon release comprehensive regulations governing prudential norms and conduct-related aspects of gold loans. This move follows growing concerns over irregular practices among certain regulated entities (REs) and the recent surge in gold-backed lending across the country. The upcoming regulations aim to harmonize gold loan guidelines across various categories of lenders, including banks and Non-Banking Financial Companies (NBFCs). Malhotra stated that while prudential and conduct rules have been issued previously, they currently vary by lender type. The revised norms are intended to unify these under a common framework, accounting for the risk-taking abilities of different entities and the systemic concerns identified during inspections and audits.

The draft guidelines will be released for public consultation, allowing stakeholders and industry experts to provide input before the final framework is implemented. This announcement had an immediate impact on financial markets. Shares of major NBFCs in the gold loan segment — including Muthoot Finance, IIFL Finance, Manappuram Finance, and Cholamandalam Investment and Finance Company — dropped by up to 7% on Wednesday as investors reacted to anticipated operational changes and stricter compliance requirements.

Background: Rising Dependence on Gold Loans

According to the RBI’s latest financial report, gold loans have seen a notable rise between September 2023 and September 2024, indicating increased reliance on gold ornaments as collateral, particularly in economically strained households and small businesses. This surge, while enabling easier access to liquidity for many, has also raised red flags within the central bank. A previous directive issued on September 30, 2024, had already urged supervised entities to revise their gold loan processes, highlighting loopholes and risks in the system.

The RBI report pointed to several key issues, including:

• Discrepancies in gold valuation practices

• Inadequate due diligence during loan processing

• Poor oversight of outsourced third-party operations

• Lack of monitoring regarding the end-use of loan proceeds

These gaps, if left unchecked, could not only threaten the integrity of the gold loan ecosystem but also undermine borrower protection and financial system stability.

NBFCs’ Dominance and Regulatory Focus

NBFCs continue to dominate the gold loan sector, accounting for nearly 59.9% of the total gold loans disbursed across India as of March 2024. Their extensive reach and flexible lending procedures make them popular among individuals and small businesses, especially in rural and semi-urban areas. However, this dominance also comes with added scrutiny. The RBI's decision to implement uniform standards and tighten oversight reflects its intent to prevent malpractice and ensure that the explosive growth in this lending space remains responsible and transparent.

Going forward, the finalized regulations are expected to address valuation mechanisms, outsourcing accountability, customer protection norms, and reporting protocols. These changes aim to create a safer and more structured gold loan environment, reducing the risks for both lenders and borrowers. As the sector awaits the official draft release, industry players are likely to recalibrate their strategies and risk frameworks to align with the RBI’s evolving expectations.