Key Highlights

• RBI's new gold‑loan rules require cash flow–based appraisals and tighter LTV monitoring, pressuring NBFCs.
• Small-ticket gold loans up to ₹2.5 lakh get LTV boost to 85%, spurring NBFC growth and liquidity.

India's thriving gold-backed loan market is set for a major regulatory overhaul, with new Reserve Bank of India (RBI) rules set to take effect on April 1, 2026. According to a report by S&P Global Ratings, the changes, which aim to strengthen credit discipline and improve consumer protection, are likely to significantly alter business models across non-banking financial companies (NBFCs), which dominate this niche lending market.

The most notable changes, according to the S&P Global Ratings report, are 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 and consumption loans exceeding Rs 2.5 lakh (approximately US$3,000).

The initial adjustment will decrease the amount of disbursement that the borrowers will be allowed up front because the interest that they must pay until the maturity date should now be considered an aspect in the LTV. This is contrary to current preferences of the borrowers whereby they tend to prefer maximum liquidity as opposed to pledged gold reserves. Lenders should, in turn, move to the more short-term loans (three to six months) to minimise the interest payable along with the loan amounts that would be more attractive under the new LTV limits.

The second modification involves lending institutions carrying out evaluation of the repayment ability of the borrowers by conducting an elaborate study of the borrowers cash flows and income. This is a major change form the conventional collateral based form of underwriting. The NBFCs that have huge portfolio of gold loans like Muthoot Finance and Manappuram Finance will have to an extra cost of training employees and implementation of systems to facilitate lending based on cash flows.

Although the regulations will cause a short-term hurdle to NBFCs, there will be an opportunity created by it according to S&P to offer institutions which can change their models within a short period and enhance underwritings.

Looking at the compliance burden in the near future, NBFCs will still have a competitive edge that they can make use of since they may have a long-standing relationship with the customers, agility in its operations, and the high pace of loan disbursement which has been helping them dominate the gold loan industry.

Banks might also have made use of regulatory arbitrage at the same time. The risk weight on gold loans made by banks is 0 percent and the risk weight of NBFCs is 100 percent thus capital management flexibility by NBFCs. Banks equally are under more regulatory scrutiny, which could also be narrowed with time as a result of harmonisation efforts by RBI.

The new framework is beneficial to the borrowers since it is more transparent and protective. The RBI has put in place a requirement that auction receipts as well as surplus collaterals must be returned in 7 days of work. It is now mandatory to direct all disbursements, which are above Rs 20,000, straight to the bank account of the borrower. Also lenders have to insist upon more transparency in matters of fee and interest disclosure.

Under the new gold loan rules, NBFCs and banks face distinct implications. NBFCs, while operationally agile and strong in the gold loan segment, need to enhance their credit appraisal capabilities, whereas banks already have robust systems in place. Regulatory disparity also exists, as NBFCs face a 100% risk weight on gold loans, compared to 0% for banks due to regulatory arbitrage, affecting cost structures. Additionally, NBFCs maintain strong customer relationships in the gold loan market, while banks exhibit varying strengths in this area, potentially influencing their competitive stance.

Also Read: RBI relaxes limitations imposed on gold loan business of IIFL Finance

There are also high chances that the reforms will also lead to the growth of the income earning gold loans, which will now be allowed by standard income charging provisions and may not be limited by LTV caps. Nevertheless, the higher the appetite to take risks and the ease of standards in this area, the greater may be risks to credit, in case there is a sudden decline in prices on gold. Worthy of mentioning, the price of gold increased by 80 percent since the end of 2023 and it steered the loan volumes to new records.

Although the threat of overleveraging in vulnerable segments of borrowers has to be taken seriously, S&P is confident the conservatism of the NBFCs in terms of their internal LTVs, together with high levels of equity cushioning would soon counter certain losses.

In general, the new regulations of the RBI aim at creating uniformity in lending, reducing the gaps in regulation, and bringing greater accountability in the credit culture of an industry traditionally low on delinquencies. These developments may introduce a greener and clearer lending environment, as gold continues to be a very critical asset to millions of people in terms of finances.