In today's FirstScroll, we break down why the RBI is suddenly tightening the screws on gold loans, and why a record ₹4 lakh crore surge in borrowing has the regulator on edge.
The short answer: The RBI is cracking down on gold loans to fix irregular practices, such as improper valuation and poor end-use monitoring, that have flooded the market. While total outstanding credit vaulted past ₹4 lakh crore this year, the regulator fears a systemic risk if gold prices crash and leave lenders with collateral worth less than the loans themselves.
The Story
Picture a small family-run jewellery shop in Thrissur, Kerala. A young man walks in with a small velvet pouch containing his mother's gold bangles.
He is not there to sell them. He needs ₹2 lakh to finish a home renovation, and he needs it by the afternoon. In less than thirty minutes, the gold is weighed, the purity is tested, and the money hits his bank account.
This scene is playing out across India at an unprecedented scale. Whether it is for a daughter's wedding, a medical emergency, or a small business bridge loan, Indians are finally putting their idle gold to work.
Then, the numbers started getting loud. Outstanding credit against gold jewellery at non-banking financial companies (NBFCs) surged 69.9% year-on-year in May, reaching ₹3.29 lakh crore. By October 2026, the total market had crossed the ₹4 lakh crore milestone.
And here is the strange part. Even as the RBI raised the repo rate to 5.50% this month, making all borrowing costlier, the appetite for gold loans showed no signs of cooling off.
So here's the question: if gold loans are backed by actual physical metal, making them the safest possible bet for a bank, why is the RBI panicking and launching a massive crackdown on rbi gold loan rules?
You see, the problem is not the gold itself. It is the machinery behind the counter that determines how much that gold is worth and what happens when the price of the metal drops.
India's central bank recently carried out a review and found several irregular practices. Some lenders were valuing gold without the customer being present, while others were failing to monitor what the money was actually being used for.
Think of a gold loan as a rubber band. One end is the market price of gold, and the other is the loan amount you receive. This connection is called the Loan-to-Value (LTV) ratio.
In India, the RBI mandates an LTV cap of 75%. This means if you bring in ₹100 worth of gold, the bank can give you at most ₹75. This 25% gap is a safety cushion for the bank.
If the price of gold falls by 10%, the bank is still safe because your collateral is still worth ₹90, which is more than the ₹75 they lent you. But if the rubber band is stretched too far through "creative" valuation, the cushion disappears.
Now add the second ingredient: "top-up" loans. Some lenders were letting customers borrow more money simply because the price of gold went up, without checking if the borrower could actually pay it back.
When you combine aggressive lending with high interest rates, you get a classic incentive clash. Banks and NBFCs want high-margin growth to please shareholders, while the RBI wants to ensure that a 10% drop in global gold prices does not turn into a 100% disaster for the banking system.
Now, you might think a few gold loans are a tiny part of the economy, so why should you care? Because for many, this is the final safety net. If you want to understand the bigger picture, you might also enjoy our story on why banks reject first time borrowers but NBFCs approve.
This safety net is currently being used by the middle class at a record pace. RBI data shows that nearly 80% of gold loans are under ₹5 lakh, often taken by families who are stretched to their breaking point by inflation.
But here's the twist. The very tool meant to help these families could become their biggest trap. If the RBI continues hiking interest rates, the cost of servicing these gold loans rises.
If a borrower misses payments, the lender must auction the gold. The RBI found that some auctions lacked transparency, meaning families were losing their heirlooms without getting the "extra" money back that the auction might have fetched above the loan amount.
To fix this, the new rbi gold loan rules now mandate that any surplus from a gold auction must be returned to the borrower within 7 days. The regulator is also forcing lenders to verify the end-use of the funds to ensure gold loans are not being used for risky stock market speculation.
Now to be clear, gold loans are still a strategic way for Indians to monetise idle assets. Unlike unsecured credit cards, these loans have a lower interest rate because the bank has your bangles in their vault.
The government and the RBI aren't trying to kill the market; they are trying to professionalise it. They want to ensure that the "valuation" of your gold is as scientific as possible, rather than a number plucked out of the air by a third-party agent.
So, is the gold loan problem about people borrowing too much? Not really. It is about a system that grew so fast that it started cutting corners to keep the momentum going.
India has the world's largest private gold hoard, estimated at over 25,000 tonnes. Whether we can turn that into a stable credit market without creating a collateral bubble is something only time will tell.
Until then…
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