Gold loan rules shake up: Gold-backed loan market faces reset under new RBI rules, says report

India’s booming gold-backed loan market is set for a major regulatory overhaul, with new Reserve Bank of India (RBI) rules expected to take effect by April 1, 2026. The changes, aimed at strengthening credit discipline and improving consumer protection, are likely to significantly alter business models across non-banking financial companies (NBFCs), which dominate this niche lending space, as per a report by S&P Global Ratings.

The S&P Global Ratings report noted the most notable changes include the mandatory inclusion of interest until maturity in the calculation of loan-to-value (LTV) ratios and the requirement for cash flow-based credit appraisal for all income-generating loans and consumption loans above Rs 2.5 lakh (approximately US$3,000).

The first change will reduce the upfront disbursal amount borrowers receive, since interest due till maturity must now be accounted for in the LTV. This challenges existing borrower preferences, which typically favour maximum liquidity against pledged gold assets. In response, lenders are expected to pivot towards shorter-tenor loans—spanning three to six months—to minimise the interest burden and make the loan amounts more attractive within the revised LTV limits.

The second change mandates lenders to assess the repayment capacity of borrowers through detailed analysis of their income and cash flows. This marks a significant shift from the traditional collateral-based underwriting model. NBFCs such as Muthoot Finance and Manappuram Finance, which have large gold loan portfolios, are expected to face increased costs in training staff and deploying systems to support cash flow-based lending.

"While the rules will pose short-term challenges for NBFCs, they also provide an opportunity for institutions that can rapidly adapt their models and strengthen underwriting standards,” S&P noted.

Despite the upcoming compliance burden, NBFCs could retain their competitive edge by leveraging long-standing customer relationships, operational agility, and faster loan disbursements—key differentiators that have fuelled their dominance in the gold loan market.

At the same time, banks may benefit from regulatory arbitrage. Gold loans by banks attract a 0% risk weight compared to 100% for NBFCs, giving them more flexibility in capital management. However, banks are subject to tighter regulatory oversight, and the RBI’s harmonisation efforts may reduce this gap over time.

From a borrower’s perspective, the new framework brings greater transparency and protection. The RBI has mandated that auction proceeds and excess collateral must be refunded within seven working days. Disbursements above Rs 20,000 must now be made directly into the borrower’s bank account. Additionally, lenders will need to ensure greater clarity in the disclosure of fees and interest charges.

Implications for NBFCs vs Banks

While the risk of overleveraging among vulnerable borrower segments remains a concern, S&P believes NBFCs’ conservative internal LTVs and strong equity cushions should help mitigate losses.

Overall, the RBI’s new rules aim to harmonise lending practices, close regulatory gaps, and foster more responsible credit culture in a segment that has historically seen minimal delinquencies. As gold continues to serve as a vital financial asset for millions, these changes may usher in a more sustainable and transparent lending ecosystem.