Gold loan providers, including banks and NBFCs, are planning to introduce monthly EMI repayment options for borrowers. This shift follows the Reserve Bank of India's (RBI) observations highlighting issues in existing gold loan practices, as reported by The Economic Times.
Under the proposed system, borrowers would repay both the principal and interest through equated monthly instalments (EMIs) from the start of the loan term. Lenders are also considering offering gold loans as term loans, replacing the widely used bullet repayment method.
Traditionally, gold loans allowed borrowers to pay the entire amount, including interest, at the end of the loan tenure. Partial payments were also permitted, as long as the total amount was settled before maturity. However, the RBI has flagged risks of defaults and irregularities with this approach.
In a September 30 circular, the RBI pointed out deficiencies in how gold loans are sourced, valued, and monitored. It also raised issues with loan-to-value (LTV) ratios, transparency in auctions, and risk assessments. Additionally, rolling over loans with partial payments was seen as problematic.
The RBI urged lenders to evaluate borrowers’ repayment capacity rather than relying only on gold collateral. A senior banker explained, "The RBI wants lenders to focus on borrowers’ ability to repay instead of depending solely on the pledged gold’s value."
