India’s rapidly expanding gold-backed loan market is poised for a significant regulatory overhaul, with new Reserve Bank of India (RBI) guidelines expected to come into effect by April 1, 2026. These changes aim to enhance credit discipline and strengthen consumer protection, potentially reshaping business models across non-banking financial companies (NBFCs) that dominate this lending segment, according to a recent S&P Global Ratings report.
Key reforms include the mandatory inclusion of interest until loan maturity when calculating loan-to-value (LTV) ratios, and a requirement for lenders to perform cash flow-based credit appraisals on income-generating and consumption loans exceeding Rs 2.5 lakh (around US$3,000).
The inclusion of interest until maturity will reduce the upfront loan amount borrowers receive since lenders must now factor in accrued interest in the LTV calculation. This challenges current borrower preferences, which favor maximum liquidity secured against pledged gold. As a result, lenders are expected to shift toward shorter-term loans, typically ranging from three to six months, to limit interest costs and offer more attractive loan amounts under the revised LTV limits.
The new cash flow-based credit assessment marks a departure from the traditional collateral-focused underwriting model. NBFCs such as Muthoot Finance and Manappuram Finance, with large gold loan portfolios, will face higher operational costs as they invest in staff training and upgrade systems to implement these credit appraisal requirements.
S&P Global Ratings highlighted that while the new rules may present short-term challenges, they also offer opportunities for lenders that adapt quickly by enhancing underwriting standards and credit evaluation processes.
Despite the increased regulatory burden, NBFCs may maintain a competitive edge due to their strong customer relationships, operational agility, and ability to process loans quickly—advantages that have fueled their dominance in India’s gold loan market.
Meanwhile, banks could capitalize on regulatory arbitrage. Unlike NBFCs, gold loans by banks currently attract a 0% risk weight compared to 100% for NBFCs, allowing banks more flexibility in capital management. However, banks are subject to stricter regulatory oversight, and ongoing RBI harmonization efforts may narrow this gap over time.
For borrowers, the reforms promise greater transparency and protection. The RBI now mandates that any auction proceeds or excess collateral must be returned within seven working days. Additionally, loan disbursements exceeding Rs 20,000 must be credited directly to borrowers’ bank accounts, and lenders are required to clearly disclose fees and interest charges.
The new framework is also expected to encourage growth in income-generating gold loans, which will adhere to regular interest servicing and may face fewer restrictions on LTV caps. However, increased risk-taking and eased norms in this segment could elevate credit risks, particularly if gold prices experience a sharp correction. Since late 2023, gold prices have surged about 80%, pushing loan volumes to record levels.
Although concerns remain about overleveraging among vulnerable borrowers, S&P believes NBFCs’ conservative internal LTV practices and strong equity buffers will help limit potential losses.
Overall, the RBI’s updated regulations seek to harmonize lending standards, close regulatory loopholes, and foster a more responsible credit culture in a sector historically characterized by low delinquency rates. As gold continues to serve as a crucial financial asset for millions of Indians, these changes may pave the way for a more transparent, sustainable gold loan market.
