Guwahati: In a move that is predictable to bring greater transparency, financial discipline, and accountability to the lending sector, the Reserve Bank of India (RBI) has revised its values for gold loans, efficiently putting an end to the before accepted practice of loan renewals.
The new guidelines order that borrowers repay the entire unresolved amount, both principal and interest, within the original tenure of the loan, which is typically six months to one year.
This important change is set to impact both borrowers and financial institutions alike, particularly in semi-urban and rural areas where gold loans are a common and often vital means of retrieving quick credit.
Why the Change?
Gold loans have long been a favoured form of secured loaning in India due to their simplicity, suitability, and relatively lower interest rates compared to unsecured loans.
Borrowers, particularly small traders, farmers, and families, often initiate gold ornaments to access short-term credit for personal or business needs.
Under the old system, many customers would pay only the interest at the end of the loan term and then opt to "renew" the loan, essentially starting a new loan cycle without ever repaying the principal. This rollover method allowed debtors to defer the repayment of the principal indefinitely, as long as interest payments were made regularly. While convenient for borrowers, this practice also posed risks to lenders and contributed to a lack of transparency in loan books.
The RBI’s revised stance seeks to put an end to this loophole. By mandating full repayment—including both principal and accrued interest—within the originally agreed period, the central bank aims to minimize credit risk, ensure better asset quality for banks and Non-Banking Financial Companies (NBFCs), and encourage responsible borrowing.
Official Perspective
Speaking to Business North East (BNE), an official from ICICI Bank provided insights into the practical implications of the RBI’s directive.
“For gold loans, borrowers are now required to repay the entire principal amount along with the interest within a defined period—either six months or one year, depending on the loan agreement,” the official explained. “Earlier, many customers would pay only the interest at the end of the tenure and then renew the loan, essentially rolling it over without settling the principal. That practice is no longer permitted under the revised guidelines. Full repayment, including interest, must be made within the original loan period.”
The official further noted that this change will require financial institutions to actively educate their customers about the new repayment norms and discourage the expectation of loan renewal as a default option.
Impact on Borrowers
For many small-scale borrowers who are familiar to the renewal model, this could mean a significant shift in financial planning.
The inability to spread or rollover the loan may place added pressure on families and small businesses to position funds for repayment within the specified timeframe.
However, financial specialists argue that this is a necessary measure for long-term financial health. By applying a one-time repayment structure, the RBI aims to promote fiscal accountability and prevent borrowers from falling into a debt trap that could accrue over successive renewals.
To comfort the change, banks and NBFCs are expected to introduce more organised repayment plans and offer better communication around loan terms and closure events.
Some lenders may even provide pre-closure incentives or offer counseling services to help borrowers understand their obligations.
Sector-Wide Hints
The gold loan industry has grown meaningfully over the past decade, with the joint portfolio of banks and NBFCs crossing several lakh crore rupees. The section saw a further increase during the COVID-19 pandemic, when families turned to gold loans to opportunity of cash flow during financial distress.
With the new norms in place, industry players will need to reassess their lending models and internal risk frameworks.
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The stress on repayment discipline is likely to result in better asset quality, abridged non-performing assets (NPAs), and improved regulatory compliance.
Though, the shift may also result in a temporary go-slow in loan disbursals, particularly in areas where renewal-based lending had become the norm. Institutions with a heavy dependence on gold loan portfolios will need to diversify and revolutionise to maintain growth while obeying with the new rules.
The Road Ahead
While the RBI’s new regulations mark a departure from traditional practices, they are largely being welcomed by economists and financial analysts as a move in the right direction. Better repayment behavior, better credit discipline, and reduced systemic risk are among the long-term benefits expected from this reform.
Borrowers, on their part, are fortified to become more informed and monetarily literate about their rights and tasks under the new system. As India’s financial ecosystem lasts to modernise, such events reflect the RBI’s commitment to building a more tough and transparent credit environment.
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