The Reserve Bank of India earlier this month came out with a draft framework around gold loan practices, stressing the need to enhance risk management and ensure “responsible” credit flow by financial institutions in the country.
Among various proposed guidelines, which will apply to all banks and NBFCs operating in the country, one key proposal has triggered a debate among experts and finance professionals. One of the draft rules states that financial institutions cannot grant any collateral-backed loan against gold mutual funds and primary gold/silver.
RBI move on gold loan draws mixed reactions
The RBI’s move has drawn mixed reactions, with some praising it and some industry experts terming the initiative another blunder after Sovereign Gold Bonds (SGBs).
Sumit Sharma, Founder, Radian Finserv – an RBI-approved NBFC specializing in gold loans, sees the move as an effort to provide uniformity in gold lending practices. The proposed restrictions on accepting gold ETFs and primary gold as collateral mark a significant shift towards reducing systemic risks, he believes.
Also read: Govt’s Gold Bond Gamble: Windfall for investors, disaster for the centre?
Expressing similar views, BankBazaar CEO Adhil Shetty says the new rules reiterate restrictions and introduce several critical reforms. These proposals, he believes, are part of effort to curb misuse, improve asset quality and reduce risk in gold-backed lending.
RBI draft rules on gold loan ‘archaic’
Taking a contrary stand on the RBI move, Vikram Dhawan, Head-Commodities and Fund Manager at Nippon India Mutual Fund, says that draft guidelines categorically disallowing the use of gold ETFs and gold mutual funds as collateral for loans, under the guise of prudential regulation, is not just conservative — it’s archaic.
The RBI move risks “becoming yet another Golden Blunder, reminiscent of India’s previous misadventure with unhedged Sovereign Gold Bonds (SGBs)”, he added.
“At a time when India aspires to be a financial powerhouse and deepen its capital markets, this policy direction sends all the wrong signals. In effect, it penalizes investors for choosing transparent, regulated, and liquid financial instruments over dusty lockers of physical gold. The message is clear: if your gold isn’t in physical form, it isn’t good enough,” Dhawan noted.
Also read: Is your investment in Sovereign Gold Bonds safe?
He believes the broader implications of these proposed regulations are severe. He lists out some of the collateral damages these draft norms can usher in:
-Lower financial inclusion: Small investors who have moved to digital gold instruments now find themselves excluded from credit facilities.
-Stifled innovation: Fintechs and NBFCs attempting to offer smart credit products using ETFs are forced to rely on outdated collateral models.
-Greater informal lending: Those denied formal loans may turn to unregulated lenders, creating more risk—not less.
According to Dhawan, ETFs are not just safe, they are the future of gold investing. It’s time the RBI stops clinging to outdated notions of risk and starts embracing the digital, transparent, and efficient instruments that modern India demands, he said, adding that otherwise, this will be remembered as another missed opportunity — a “Golden Blunder” we cannot afford to repeat.