RBI's new gold loan guidelines leave farmers, MSMEs deeply worried

Fifty-four-year-old KV Elangeeran, a farmer from Villupuram, Tamil Nadu, has pledged his wife's four-sovereign gold chain three times over the past four years. Whenever the monsoon failed or floods destroyed his paddy crops, he turned to the nearby bank, using the gold chain as collateral for a loan.

Elangeeran was devastated when the Reserve Bank of India (RBI) issued draft guidelines for gold loans with stringent regulations.

Also read | TN leaders slam RBI's new gold loan norms, say it hits financial lifeline

“Farmers in Tamil Nadu like me are major borrowers of gold loans. It’s an emergency loan and also an instant loan that helps me recover from losses or invest additional money in cultivation. If banks are rigid to value my gold only based on 22 carat and ask to obtain a purity certificate I would be left without support,” said Elangeeran with despair.

RBI’s draft guidelines

In April, the RBI issued draft guidelines aiming to establish uniform rules and regulations for obtaining gold loans from banks and Non-Banking Financial Companies (NBFCs). The draft rules impose restrictions on the type of gold eligible as collateral, the maximum loan amount a bank or NBFC can extend, and various payment rules.

As per the draft guidelines:

The RBI proposes to cap the Loan-to-Value (LTV) ratio at 75% for all lenders.

Borrowers must furnish proof of ownership for the gold used as collateral.

Borrowers need to obtain a gold purity certificate from banks.

Gold loans will be available only against eligible forms of gold, such as 22-carat gold.

Loans can also be taken against silver, provided it has a minimum purity of 92.5%.

The draft prescribes a new format for calculating the value of gold pledged by borrowers.

The aggregate weight of ornaments pledged for loans shall not exceed 1 kg per borrower.

Reviewing feedback

The loan agreement will include details such as the description of the gold taken as collateral, the value of the collateral, details of the auction procedure, circumstances leading to the auction of gold collateral, and the notice period allowed to the borrower for repayment or settlement of the loan before the auction is conducted.

Pledged gold must be returned within seven working days to the borrower after full payment.

The RBI is currently reviewing feedback received from various stakeholders, including public responses, before finalising the guidelines.

Although Union Finance Minister Nirmala Sitharaman has recommended excluding small borrowers (taking loans up to Rs 2 lakh) from the new guidelines and deferred implementation of norms to January 2026, farmers like Elangeeran remain unconvinced.

Condemning the new RBI guidelines, Elangeeran told The Federal, “We need quick loans without delay. We cannot afford to take personal loans with high interest. Gold loans were our only saviour. Now we are in distress with the new formats that would force us to go to moneylenders or sell our gold.”

Also read | As gold prices zoom, TN sees surge in fake hallmark jewellery

He added that the inclusion of silver coins for pledging in banks reminds him of his teenage years when his mother would pledge brass vessels to take small loans for cultivation.

“The RBI allows loans against silver as collateral. This shows the kind of deep distress in our villages. While providing subsidies and assistance to corporates, small farmers like me are punished with guidelines. We feel we are indirectly informed to pledge whatever we have at home including silver,” he said.

Study reports say Indian households hold an estimated 25,000 tonnes of gold, valued at around ₹126 lakh crore. Scores of farmers, entrepreneurs, micro and small enterprise owners, and several low- and middle-class families use gold to raise funds for agricultural activities, medical emergencies, school fees, weddings, and business needs. Since gold loans became easily accessible, the loan segment in various public sector banks and private NBFCs has surged over the years.

Setback for less privileged

The new RBI guidelines would burden scores of less privileged people, said G Krithika, MSME entrepreneur and Vice President of the Coimbatore Compressor Industries Association (COCIA). She indicated that small and medium-scale entrepreneurs would not gain any relief from the recommendations made by Sitharaman.

“When banks ask for bills for loans above ₹2 lakh, it affects many of us. We pledge gold when we face a cash crunch. If we delay sending our products due to a need for funds, we will lose our business," Krithika told The Federal.

"The ceiling set by the ministry should be revised further. We pay hefty GST for every single transaction our MSME firms make. With these rules, we would not be able to manage our business and end up as paupers,” she added.

Jolt to gold loan market

Since the new guidelines state that the gold value would be calculated based on 22-carat purity, many small-scale business entrepreneurs who do not possess hallmarked jewellery would be impacted.

“Many women entrepreneurs step into business and take small risks with the hope that they can handle emergency situations by pledging the gold they have. Many of us do not possess the necessary bills for the gold jewellery inherited from our ancestors. The majority of the gold is not hallmarked. New guidelines are very confusing and would push us into deep debts,” Krithika told The Federal.

Several studies, including one by ICRA (Investment Information and Credit Rating Agency), predict that the gold loan market will reach ₹15 lakh crore by March 2027. However, with the new guidelines imposing strict norms, experts say the growth of the gold loan market might shrink.

Punishing common man

In an interview with The Federal, economist K Prabhakar commented that the gold market would shrink once the guidelines are implemented and would also affect the growth of farmers and the MSME sector in a serious manner.

Also read | RBI’s new gold loan rules: Help or hassle? Economist Prabhakar explains

“The gold loan market will shrink for the banks. Non-banking financial companies may capture some of that market. The market may revert to the informal sector. What is the purpose? RBI wanted more transparency and formalisation, but these guidelines are causing the opposite.”

He added that instead of studying why people are borrowing so much against gold, the RBI would be punishing the common man without reason. “The growth of the gold loan market shows the pain of the people who rely on gold loans to meet their needs. With these rules, the RBI will be punishing the man who is already punishing himself by selling the family gold,” he added.