TN CM urges FM Sitharaman to reconsider RBI’s gold loan restrictions

Tamil Nadu Chief Minister MK Stalin, in a letter to Union Finance Minister Nirmala Sitharaman, expressed deep concerns about the Reserve Bank of India’s (RBI) draft guidelines under the (Lending against Gold Collateral) Directions, 2025.

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

The proposal, which seeks to prohibit banks from using gold as collateral for agricultural loans up to Rs 2 lakh, threatens to upend rural credit systems, particularly in Tamil Nadu and South India, where gold-backed loans are a vital lifeline for short-term agricultural financing.

CM highlights adverse implications

Stalin highlighted that small and marginal farmers, tenant cultivators, and those in allied sectors like dairy, poultry, and fisheries heavily rely on gold loans due to the lack of formal land titles or verifiable income documentation.

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

“Pledging household gold has been a viable and dignified route to access institutional credit,” he wrote, warning that the proposed restriction would exclude many genuine borrowers from the formal financial system.

Stalin outlined the following adverse implications of the draft policy:

Disruption of formal credit access: The ban would cut off a key channel for small farmers, pushing them towards exploitative informal moneylenders charging exorbitant interest rates.

Rise in informal lending: This shift could deepen rural indebtedness and undermine financial inclusion efforts.

Operational challenges: New requirements for documented repayment capacity assessments are impractical for small agricultural loans, potentially causing procedural delays, misclassification of credit, and increased compliance burdens.

Impact on seasonal credit: Gold loans enable swift access to funds for critical farming activities like sowing and harvesting. Restrictions could delay credit flow, hampering productivity and rural economies.

Threat to Priority Sector Lending (PSL): Gold-backed loans constitute a significant portion of PSL credit for agriculture. The restriction could hinder banks’ ability to meet PSL targets, slowing rural credit growth.

Stalin urged Sitharaman to advise the RBI to reconsider the proposed restrictions, emphasising the need to continue allowing gold as collateral for agricultural and allied loans up to Rs 2 lakh. He called for a balanced regulatory approach that maintains credit discipline while ensuring financial access for vulnerable rural communities.