Small borrowers at risk? Finance ministry flags concerns over RBI's draft gold rules, seeks exemption

The Finance Ministry has asked the Reserve Bank of India (RBI) to revise its draft guidelines on gold-backed loans to safeguard small-ticket borrowers. The suggestions, submitted by the Department of Financial Services (DFS), aim to ensure that individuals seeking loans of up to Rs 2 lakh are not adversely impacted by the proposed norms.

In a post on X on May 30, the ministry said the recommendations followed a detailed review of the RBI’s draft framework, conducted under the guidance of Finance Minister Nirmala Sitharaman.

One key recommendation is to exempt loans below ₹2 lakh from certain provisions. According to the ministry, this would help preserve the ease and speed of disbursing small-ticket loans, which are often used to meet immediate financial needs.

The DFS has also suggested pushing the implementation date of the proposed framework to January 1, 2026. This deferral would give financial institutions and stakeholders adequate time to make operational adjustments at the grassroots level.

“Given the operational impact at the field level, the DFS has conveyed that a phased rollout starting January 2026 would be more practical,” the ministry stated.

The RBI is currently reviewing these inputs, along with public comments and industry feedback, before finalising the guidelines.

The draft norms are part of the RBI’s broader move to strengthen the regulatory framework around gold-backed lending. However, stakeholders have raised concerns that the uniform application of these rules may unintentionally limit access for the most vulnerable borrowers.

"The recommendations made by the DFS mark a progressive step. The phased implementation timeline and exemption for gold loans below Rs 2 lakh reflect a deep understanding of the socio-economic realities of India’s underserved and rural borrowers, who largely depend on gold-backed credit for livelihood, education, and emergencies. At Muthoot Finance, we are fully aligned with the RBI’s vision of responsible lending and remain committed to working collaboratively with all stakeholders to ensure smooth on-ground execution," said George Alexander Muthoot, MD, Muthoot Finance.

What the draft rules say

RBI’s proposed guidelines seek to tighten underwriting, collateral handling, and fund monitoring for gold loans. One major change is the requirement for gold-backed loans to maintain a loan-to-value (LTV) ratio below 75% throughout the loan term, including accrued interest. This could reduce disbursals under the popular bullet repayment structure—from the current 65-68% to around 55-60% of the gold’s value.

Bullet repayment involves paying the full principal and interest at the end of the loan period rather than in instalments. The reduced LTV could make small-ticket gold loans less attractive.

Lenders will also be asked to cap gold loan exposure within their portfolios, with limits reassessed based on recovery rates and capital adequacy.

Challenges in draft rules

Saurabh Bansal, Founder of Finatwork Investment Advisor, warns that RBI’s proposed gold loan norms could slow instant or small-ticket disbursements. Stricter eligibility, added documentation, and capped loan-to-value (LTV) ratios may reduce loan availability and amounts. Fintechs could face higher administrative burdens, tougher onboarding requirements, and tech challenges like ensuring data security and scalability. These regulations may also exclude informal-sector borrowers lacking credit records, forcing them toward predatory informal lenders. While aiming to enhance transparency and borrower protection, the rules risk curbing access for financially vulnerable sections of society.

"Under RBI's draft guidelines, pressing a uniform 75% LTV ratio during the loan tenure (particularly for bullet repayment structures), may require significant shifts from the existing lending models that are reasonable available to borrowers. In particular, borrower LTV sizes could drop significantly in the near term. It will be incumbent on fintech companies to strengthen their operations and technological exposure to comply with the guidelines (across accurate gold purity testing and ownership verification). The thrust on risk management practices in the guidelines, combined with the evolving sector, necessitates an ongoing evaluation of different credit models," said Puja Abhishek Singh, CEO, Manipal Fintech.