Non-banking financial companies (NBFCs) have approached the Reserve Bank of India (RBI) to consider capping the loan-to-value (LTV) ratio of gold loans being offered to businesses.
From April 1, under the new gold loan guidelines, there will be no regulatory cap on these loans. This implies that NBFCs could advance up to 100% or even more against the pledged gold for loans taken for business purposes. Big lenders fear that this will lead to over aggression by some players wanting to capture market share and lead to systemic problems.
According to sources, the Finance Industry Development Council (FIDC), the self-regulatory organisation (SRO) of NBFCs, recently made a representation to the central bank to consider retaining the cap at 75% for gold loans being extended for business purposes or income-generating lending.
Parity and Prudence
“This is to ensure parity among players and prevent smaller, riskier competitors from offering excessively high LTVs that could destabilise the market,” said a senior official of a gold loan NBFC having assets under management of around Rs 45,000 crore.
While the RBI’s move to allow higher LTVs for business loans could boost credit flow to entrepreneurs, but it also has the potential create problems as the prices of gold keep on fluctuating. For example, gold prices rose 24% in January, but fell 7.82% in February.
Industry players, especially large NBFCs, fear that unlimited lending could spoil the market by encouraging aggressive practices and creating a disparity between consumer and business loans.
Managing Volatility
In fact, some of them have already decided that they will continue with the old practice to maintain discipline. “Large gold loan NBFCs have decided to maintain a conservative LTV of around 75% for risk management, even if their boards have approved up to 90% as a policy limit to avoid market distortion and maintain parity across categories,” said the CEO, who added, “This self-regulation reflects the industry’s commitment to prudence and market stability.”
From April 1, 2026, the new rules will come into effect when gold loans for consumption activity will be tier-based, with lending capped at 85% for loans up to Rs 2.5 lakh, 80% for gold loans valued between Rs 2.5 lakh and Rs 5 lakh, and 75% for gold valued above Rs 5 lakh. Currently, every loan, whether consumption or income generating, is capped at 75%.