Despite hardships for vulnerable borrowers, banks are leveraging loopholes to comply with RBI norms while maintaining profitability and customer satisfaction.

The new strict guidelines of Reserve Bank of India (RBI) for gold loans have led private and nationalised banks, co-operative banks and Non-Banking Financial Companies (NBFCs) to adopt various strategies to comply with the norms, which restrict the closure of gold loans within 12 months.

Under the new norms, the maximum tenure for gold loans with monthly instalments has been reduced from 36 months to 12 months. Although the new norms are giving a hard time, particularly to economically vulnerable borrowers, the banks have begun leveraging loopholes in the system to comply with the RBI regulations while maintaining profitability and customer satisfaction.

When TNIE visited branches of private and nationalised banks in Chennai, the branch staff explained that they employ many strategies, including monthly auto-debit of interest from savings accounts, technical closures – wherein loans are temporarily repaid and immediately renewed with fresh documentation, closure of loans and re-pledging under a family member’s name by simply paying the interest, automatic settlement of dues by debiting from savings account, and expediting the auction process to minimise defaults after the 12-month loan tenure ends.

A branch manager of a nationalised bank in Chennai explained, “Most customers who took gold loans last year believed they could renew them by paying only the interest. Some customers are now unable to fully repay their loans or are forced to borrow from moneylenders. In such cases, we advise them to bring a family member, open a basic savings account in their name, and then pledge the same jewellery under the relative’s name. The loan amount is used to settle the original borrower’s dues on the same day.”

The bank staff noted that many resort to gold loans as a last option as they can’t avail of personal/business loans due to low CIBIL scores and they often receive only 45-50% of the gold’s value as loan, compared to the usual 70-75% loan-to-value (LTV) ratio.

“These customers often struggle to close their loans due to hospitalisations. In such situations, we close the existing loan and re-pledge the gold the same day for a higher amount, recording a ‘technical closure’. The RBI’s rule mandating a 24-hour gap between loan closure and re-pledging has not yet been fully integrated into the banking software of private banks. It may take another two weeks to incorporate the changes,” said a branch manager from a private bank.

Incidentally, a few customers of IOB alleged that outstanding balances of gold loans were debited directly from their savings account. Hence, many account holders faced hardship when their salaries, credited shortly after loan closures, were automatically adjusted against the loan dues. In many cases, cheques deposited for emergency needs were used to settle these balances. The closure occurred between December 2024 and February 2025.

A resident of Ambattur said he received a text that his gold loan was closed by IOB, and a negative balance of Rs 1.4 lakh was posted in his salary account just two days before payday. When his salary was credited, it was automatically adjusted against the loan.

"I have been receiving warnings that my credit score would get affected. Eventually, I pledged my gold with a private bank to manage my needs.”

However, an official spokesperson for IOB said the actions were taken in line with RBI norms and in the best interest of customers. “In certain cases, where repayments are pending and sufficient funds are available, the bank may recover dues from the linked account to help customers avoid the impact of overdue payments on their credit profile,” said the official.

Courtesy : The New Indian Express