RBI’s Stern Warning Sparks Change
The Reserve Bank of India (RBI) has expressed dissatisfaction with irregularities in gold loan practices, issuing a strict warning to banks and gold loan companies. This has prompted the industry to consider introducing monthly repayment plans for borrowers, marking a potential shift in how gold loans are structured and repaid.

From Bullet Repayment to Monthly EMIs
Traditionally, many gold loans have relied on the “bullet repayment” system, allowing borrowers to repay the principal and interest at the end of the loan term without monthly installments. However, in light of RBI’s directives, lenders are exploring options to make borrowers begin paying principal and interest through Equated Monthly Installments (EMIs) soon after loan approval.

Additionally, gold loan providers are also looking at term loan models to ensure better financial discipline and mitigate risks. This could mean an end to partial payments or deferred repayments, which the RBI criticized as fostering unhealthy practices in the sector.

RBI Highlights Industry Irregularities
In a circular dated September 30, the RBI flagged several issues in the gold loan sector. These included concerns over sourcing and valuation processes, auction transparency, monitoring of Loan-to-Value (LTV) ratios, and risk-weighting practices. The central bank emphasized that extending loans based solely on collateral value, without assessing the repayment capacity of borrowers, is unsustainable.

A senior banking official stated, “The RBI’s mandate is clear: gold loan companies must assess borrowers’ repayment ability instead of relying solely on pledged jewelry. Monthly payment plans are being designed to address this issue.”

Industry’s Response: A Step Towards Transparency
In response to the RBI’s concerns, banks and Non-Banking Financial Companies (NBFCs) are planning to introduce structured monthly repayment plans. These reforms aim to bring transparency and discipline to the gold loan segment, ensuring that borrowers are not burdened with a lump sum payment at the end of the loan tenure.

The shift is expected to include:

Introduction of EMI-based repayment structures.

Enhanced scrutiny of borrowers’ financial capabilities.

A move away from the prevalent bullet repayment model.

Future Outlook
The RBI’s intervention is poised to bring significant changes to the gold loan industry. These changes aim to balance borrower convenience with lender security, ensuring sustainable practices in the long run. As banks and gold loan companies gear up for this transformation, borrowers should be prepared for a more structured repayment process in the near future.

This overhaul not only aligns with regulatory expectations but also sets the stage for greater financial accountability within the gold loan sector.