Banks can now voluntarily accept gold as collateral for loans up to ₹10 lakh, a move expected to simplify credit access for farmers and small business owners. This clarification regarding the classification of gold-backed loans within priority sector lending aims to encourage banks to extend more credit to these vital segments of the economy.

The directive ensures that borrowers who voluntarily pledge personal gold or silver assets retain access to collateral-free loan benefits and terms. This prevents inadvertent disqualification from favorable lending conditions due to security provision. The directive is expected to reduce rural dependence on informal moneylenders by providing formal banking alternatives with comparable speed and accessibility.

The change is expected to enhance financial inclusion. In rural India, gold remains the most liquid household asset. By allowing its use as security, banks can process loans faster, especially critical during sowing seasons or emergencies. Gold-backed loans are easier to disburse, reducing dependence on informal moneylenders and tightening repayment discipline.

In 2023, the RBI had asked banks to classify all loans that were advanced against the security of jewellery as ‘gold loans’.However, this reclassification also meant that banks would need to apply the stricter repayment norms that are applicable to gold loans, unlike loans to farmers, where some flexibility is provided for the seasonality of income. Because of the reclassification, the gold loan portfolio of public sector banks almost doubled last year.

Banks, in turn, benefit from a lower risk profile. Secured lending makes it easier to expand credit to underserved rural borrowers. The move could also help banks meet priority sector lending goals. The rules permit only physical gold and silver, such as jewellery, ornaments and coins, as collateral. Financial products like gold ETFs, mutual funds, or digital gold are excluded. This distinction aims to keep volatility in check and lending standards robust