Gold & Jewellery Funding — Clearing the Fog (Regulatory Perspectives) - Part 1

What Works, What Doesn’t, and Why the Confusion Persists

Gold Jewellery Business Series - Episode 13

India’s gold ecosystem sits at the intersection of culture, collateral, credit, and compliance. As gold loans surge and jeweller-led schemes multiply, so do questions:

• Why can a customer buy gold on a credit card but not on EMI?

• Why is a personal loan “allowed” but a gold purchase loan not?

• Can NBFCs step in where banks hesitate?

• Does routing money through a wallet or escrow make a difference?

• Where does bullion funding stand — and why is it treated differently from jewellery?

This episode attempts to answer these questions exhaustively, using regulatory text, not interpretation gymnastics.

1. The Root of the Confusion: “Gold” Is Not One Product

Most debates fail because they treat gold as a single category. From a regulatory lens, gold appears in multiple, very different avatars:

Form of Gold	Regulatory Treatment
Gold jewellery pledged as collateral	Permitted (subject to prudential norms)
Bullion / primary gold / coins	Restricted
Loan for purchase of gold	Discouraged / restricted
Loan against gold jewellery	Permitted
Jeweller savings schemes	Commercial activity (with caveats)

The regulatory stance depends not on metal, but on risk behaviour.

 The prudent LTV rule for gold jewellery loans has been explicitly updated under the RBI’s 2025 gold loan framework, and it’s important to explain this accurately   (and regulators) see exactly what the RBI has done and why.

📌 Updated Loan-to-Value (LTV) Norms in RBI’s 2025 Gold Loan Guidelines

Under the Reserve Bank of India’s revised regulatory framework for lending against gold collateral, the LTV ratio for gold jewellery loans is now tiered based on the loan amount, rather than a flat percentage as in earlier norms. This change is designed to balance access to credit with prudential risk management.

The new LTV caps (effective 1 April 2026) are:

Loan Amount (per borrower)	Maximum LTV Ratio
≤ ₹2.5 lakh	85%
> ₹2.5 lakh & ≤ ₹5 lakh	80%
> ₹5 lakh	75%

Thus, smaller, low-ticket gold loans can now carry a higher LTV (up to 85%) compared with larger gold loans, which remain capped at the more conservative 75%.

Under the Reserve Bank of India’s 2025 gold loan guidelines, the Loan-to-Value (LTV) ratio for gold jewellery loans is tiered by ticket size: up to 85% for loans of ₹2.5 lakh or less, up to 80% for loans between ₹2.5–5 lakh, and up to 75% for loans above ₹5 lakh, effective from April 1, 2026.

🧩 Practical Takeaways for Bankers and NBFCs

• Lender policy must align with regulatory caps: Banks and NBFCs must build product logic that respects the tiered LTV schedule, not just a flat ceiling.

  
  

• Approval workflows must embed LTV checks: MIS, credit apps, and underwriting systems must enforce the correct tier based on loan amount.

  
  

• Valuation and purity norms become more critical: At higher LTV ratios, precision in valuation and collateral assessment gains importance.

  
  

• Risk committees should revisit exposure limits: Given the differentiated caps, portfolio risk assessment frameworks should incorporate tier-weighted exposure behaviour.

2. What RBI Explicitly Restricts

2.1 Loans / Advances for Purchase of Gold

RBI has, across multiple circulars and master directions, discouraged or restricted regulated entities from extending loans for the purpose of purchasing gold in any form, including:

• Jewellery

• Coins

• Bullion

• Gold ETFs / mutual fund units

  
  

  

This restriction is strongest and most explicit for NBFCs, and is rooted in RBI’s concern over:

• Speculative price exposure

• Commodity-linked credit expansion

• Asset bubbles masked as retail lending

👉 Key point: A loan whose intent is gold purchase is treated very differently from a loan secured by gold.

Why the Regulator Pushes Back on Gold Purchases Funded by Credit

(A simple regulatory flow)

Step 1: Individual intent appears harmless

A customer borrows to buy gold. No fraud. No default. No immediate stress.

Step 2: Credit + gold scales rapidly

When the same behaviour repeats across lakhs of borrowers:

• Credit demand rises

• Gold demand rises simultaneously

  
  

Step 3: Gold is not a neutral consumer good

Gold:

• Is a store of value, not consumption

• Rises during inflation, currency stress, geopolitical risk

• Encourages migration from financial to physical assets

Step 4: Credit begins funding price exposure, not repayment capacity

Repayment becomes implicitly linked to:

• Gold price movements, or

• Future liquidity events

This converts credit risk into asset-price risk.

Step 5: A self-reinforcing loop emerges

Credit → Gold demand → Higher prices → Higher borrowing capacity → More credit

This is classic leverage-fuelled asset inflation.

Step 6: Macro risks surface

At scale, this leads to:

• Higher gold imports → Current Account pressure

• Weaker monetary policy transmission

• Balance sheets indirectly exposed to commodity volatility

Step 7: The regulatory line is drawn

Rather than judge intent case-by-case, the regulator:

• Prohibits or discourages loans for purchasing gold

• Allows loans against existing gold

• Tolerates fungibility leakage, but blocks structured facilitation

Banks may monetise existing assets, but must not finance speculative accumulation of macro-sensitive commodities.

2.2 Loans Against Bullion / Primary Gold / Coins

Both banks and NBFCs face restrictions on:

• Lending against bullion or primary gold

• Structured products linked to gold price movements

• Buy-back or assured-return gold schemes funded through credit

  
  

Bullion is treated closer to a commodity exposure, not a household collateral asset.

What the regulator actually says (conceptually)

The RBI’s position across gold-loan circulars and Master Directions is consistent on this core distinction:

❌ Not permitted

Credit for the purpose of purchasing gold(in any form — jewellery, coins, bullion, ETFs, MF units)

This is what the regulator discourages.

✅ Permitted

Loans against gold jewellery already owned by the borrower, subject to:

• Loan-to-Value (LTV) limits

• KYC, valuation, custody norms

• Prudential exposure norms

This is standard collateralised lending, not speculative financing.

Scenario	Regulatory view
Loan to buy gold	❌ Asset-price leverage
EMI / structured gold purchase	❌ Credit-driven accumulation
Loan against owned jewellery	✅ Collateral monetisation
Renewal/top-up against same gold	✅ Within LTV

In summary, regulation does not oppose gold as a household asset or collateral.

The regulatory concern is triggered when credit is used as a vehicle to acquire gold.

The interpretations that follow in Episode 14 will explore practical product design, permissible structures, and how lenders can safely innovate within the regulatory boundary.

TO BE CONTINUED AS PART 2 in EPISODE 14