A Gold Loan is a secured loan where a borrower pledges gold articles (jewellery or specially minted coins) as collateral.
The lender (a bank or an NBFC) gives cash against that pledged gold.
1. How a Gold Loan Works — Step by Step
- Pledge: Borrower brings gold to the lender.
- Valuation: Lender checks purity (carat) and net weight. Stones and non-gold parts are excluded.
- LTV Determination: Lender applies the Loan-to-Value (LTV) ratio to decide the loan amount.
- Sanction & Disbursal: Loan is sanctioned and money is paid quickly — often same day.
- Storage: Gold is stored in the lender’s secure vault.
- Repayment: Borrower repays principal + interest as per the schedule.
- Release: On full repayment, the gold is returned.
Example: Gold value = ₹1,00,000; LTV = 75% → Loan = ₹75,000.
2. Key Terms to Remember
- Collateral: Pledged gold.
- LTV (Loan-to-Value): Percent of gold value given as loan.
- Valuation Certificate: Document stating purity, net weight, assessed value.
- Bullet Repayment: Entire principal + interest repaid at loan end.
- Vault: Secure place where pledged gold is stored.
3. RBI Rules & Regulatory Framework
Regulator: Reserve Bank of India (RBI).
RBI issues rules for banks and NBFCs to ensure fairness and stability.
Main RBI Requirements
- Maximum LTV: 75% (general cap).
- Tiered LTV (flexibility):(used to promote small loans — remember for exams)
- Loans ≤ ₹2.5 lakh → LTV up to 85%.
- Loans ₹2.5–5 lakh → LTV up to 80%.
- Loans > ₹5 lakh → LTV capped at 75%.
- Valuation Transparency: Valuation must be board-approved and done in borrower’s presence. Borrower must get a certificate with purity, gross & net weight, and assessed value.
- Gold Price for Valuation: Use 30-day average of 22-carat gold (IBJA) or previous day price — whichever is lower.
- Eligible Collateral: Jewellery, ornaments, specially minted bank coins (limit 50 g per customer). Bullion/bars/Gold ETFs are not allowed as standard collateral for gold loans.
- Repayment Capacity: Lenders must assess borrower’s repayment ability (not purely collateral-based).
- Tenure Cap for Bullet Loans: Maximum 12 months for bullet repayment loans.
- KYC & Ownership: Basic KYC mandatory. Lender must verify ownership; may take a declaration if ownership is doubtful.
4. Valuation & Documentation
Valuation steps:
- Check purity (carat).
- Weigh gold (exclude stones).
- Compute market value (as per RBI price rule).
- Apply LTV → final loan amount.
Documents given to borrower:
- Valuation certificate (purity, net weight, assessed value).
- Loan agreement with interest, tenure, charges, and conditions.
- Receipt for pledged gold.
5. Eligible & Ineligible Collateral
| Eligible | Not Eligible (for normal gold loan) |
|---|---|
| Jewellery & ornaments (min 18-carat usually) | Primary gold, gold bars, bullion (unless bank policy allows special schemes) |
| Specially minted gold coins sold by banks (≤50 g/customer) | Gold ETFs / Mutual Fund units |
| Minted coins from bank schemes | Jewellery with doubtful ownership (needs extra verification) |
6. Interest, Tenure & Repayment Options
Interest Rate: Varies by lender. NBFCs often charge higher rates than banks. Rate may link to an external/internal benchmark.
Repayment Tenures:
- Bullet loan: Up to 12 months (interest may be serviced monthly).
- EMI loans: Banks may offer EMIs up to 36 months for retail schemes.
- Overdraft facility: Sanctioned limit; interest only on utilized amount. Good for businesses.
Prepayment: Many lenders waive prepayment charges — check product terms.
7. Banks vs NBFCs — Comparison Table
| Feature | Banks (PSBs/Private) | Gold Loan NBFCs (e.g., Muthoot, Manappuram) |
|---|---|---|
| Interest | Generally lower | Usually higher |
| Speed | Slower (more paperwork) | Very fast (hours) |
| Reach | Wide but not always gold-focused | Deep rural & semi-urban presence |
| Product Flexibility | Moderate | High (many tailored plans) |
| PSL (Agriculture) | Can offer Agri Gold Loans as PSL | Generally not PSL unless tied up with bank |
8. Priority Sector Lending (PSL) & Special Purposes
- Agri Gold Loans: Can be classified under Priority Sector Lending (PSL) when used for direct agriculture or allied activities.
- Interest Subvention: Farmers may get subsidized rates under government schemes (e.g., loans ≤ ₹3 lakh at lower effective rates with prompt repayment incentive).
- Documentation for Agri Loans: Proof of cultivation or landholding may be required.
9. Socio-Economic Importance
- Financial inclusion: Provides formal credit to borrowers without long credit history.
- Fast working capital: MSMEs and traders use gold loans for urgent funds.
- Monetizes idle assets: Converts household gold into usable liquidity.
- Alternative to informal lenders: Safer than moneylenders who charge very high interest.
10. Risks & Safeguards
Risks:
- Price volatility of gold → lender risk if prices fall.
- Fraud / ownership disputes over pledged jewellery.
- Over-leveraging by borrowers.
Safeguards (RBI & lenders):
- LTV caps to reduce exposure.
- Valuation certificates and KYC to prevent fraud.
- Maintenance of LTV during tenure (margin calls or top-up may be required in some policies).
- Secure vaulting and insurance for stored gold.
11. Bank of Baroda — Key Product Details
Products: Retail Gold Loan, Agri Gold Loan.
| Feature | Bank of Baroda (Key Points) |
|---|---|
| Max Loan | Up to ₹50 lakh per borrower |
| Eligible Collateral | Jewellery min 18-carat, bank minted coins (≤50 g) |
| Tenure | Retail EMI: up to 36 months; Retail demand/OD & Agri: up to 12 months |
| Processing Fees | Nil for loans ≤ ₹3 lakh; nominal fee above that |
| Prepayment Charges | Nil (no penalty for prepayment) |
| Guarantor/Income Proof | Not required generally for retail gold loans |
| Eligibility | Resident Indians, age 18–75; must be lawful owner of pledged gold |
| Interest (as noted by you) | Rates (mid-2025) approx 8.85% – 9.40% p.a. (subject to change) |
| Agri Benefits | Agri gold loans up to ₹3 lakh can qualify for Interest Subvention (lower effective rate) |
Repayment modes offered: EMI, Bullet repayment, Overdraft facility.
12. Documentation Checklist
- Application form (filled & signed)
- KYC proof: Aadhaar / PAN / Voter ID / Passport (ID & Address)
- Passport size photograph
- Declaration of ownership (if required)
- For Agri loans: proof of landholding or cultivation
13. Short Revision:
- Definition: Loan against pledged gold jewellery.
- Regulator: RBI.
- Max LTV: 75% (general). Tiered LTV: 85% ≤ ₹2.5L, 80% ₹2.5–5L, 75% > ₹5L.
- Eligible collateral: Jewellery, bank minted coins (≤50 g). No bullion/bars/ETFs.
- Valuation: In borrower’s presence; valuation certificate mandatory. Price based on 30-day average or previous day (lower).
- Bullet loan tenure cap: 12 months.
- Agri gold loans: May be PSL and qualify for interest subvention (e.g., loans ≤ ₹3L).
- Bank of Baroda: Up to ₹50L, EMI up to 36 months, prepayment nil.
14. Typical Exam Questions
⭐ Gold Loan
- A gold loan is:
A. Unsecured loan
B. Secured loan against pledged gold articles
C. Loan against property
D. Government subsidy
Answer: B — Gold is pledged as collateral. - Which regulator issues guidelines for gold loans in India?
A. SEBI
B. IRDAI
C. RBI
D. PFRDA
Answer: C — Reserve Bank of India. - Maximum general LTV (Loan-to-Value) cap as per RBI norms is:
A. 60%
B. 75%
C. 85%
D. 90%
Answer: B — Standard cap is 75%. - Under tiered LTV structure, loans up to ₹2.5 lakh may have LTV up to:
A. 70%
B. 75%
C. 80%
D. 85%
Answer: D — Small loans can have higher LTV (85%). - Which of the following is NOT eligible collateral for standard gold loans?
A. Gold jewellery
B. Bank-minted gold coins (≤50 g)
C. Gold bars and bullion (regularly)
D. Ornaments of 18-carat purity
Answer: C — Bullion/bars generally not allowed for standard retail gold loans. - Valuation of pledged gold must be done:
A. In the borrower’s absence
B. Remotely by a third-party appraiser only
C. In the presence of the borrower, with certificate issued
D. By the borrower only
Answer: C — RBI requires valuation in borrower’s presence and certificate. - For valuation the gold price reference used is:
A. Spot price of 24-carat gold only
B. 30-day average closing price of 22-carat gold (IBJA) or previous day price, whichever is lower
C. Wholesale rate of seller’s choice
D. Retail price with making charges
Answer: B — RBI prescribes 22-carat average or previous day lower price. - Which item must be excluded from net weight during valuation?
A. Pure gold portion
B. Precious stones, non-gold parts
C. Hallmark details
D. Purity certificate
Answer: B — Stones/other metals excluded. - Who must verify ownership of pledged gold?
A. Borrower only
B. Lender (may take declaration)
C. RBI directly
D. Local police only
Answer: B — Lender must verify ownership; may take declaration if doubtful. - Bullet repayment loans (principal & interest at end) have maximum tenure capped at:
A. 6 months
B. 12 months
C. 24 months
D. 36 months
Answer: B — RBI caps bullet repayment tenure at 12 months. - Which document must lender give at sanction showing purity, gross & net weight and value?
A. Loan sanction letter only
B. Valuation certificate / receipt
C. Bank statement only
D. None required
Answer: B — Valuation certificate required. - Which institution dominates rural penetration for gold loans?
A. Foreign banks
B. Specialized gold-loan NBFCs (e.g., Muthoot, Manappuram)
C. Insurance companies
D. Mutual fund houses
Answer: B — NBFCs have deep rural presence. - Compared to banks, NBFC gold lenders typically offer:
A. Lower interest rates always
B. Faster processing and higher rates
C. No doorstep services
D. Less rural reach
Answer: B — NBFCs are faster but often charge higher rates. - Agri gold loans can be classified under:
A. Capital market instruments
B. Priority Sector Lending (PSL)
C. Foreign portfolio investment
D. None of the above
Answer: B — Agricultural gold loans for direct agri use qualify as PSL. - A common benefit for farmers taking agri gold loans is:
A. Automatic waiver of principal
B. Interest subvention under government schemes (for eligible loans)
C. No KYC required
D. Unlimited loan amount
Answer: B — Interest subvention may apply (e.g., for loans ≤ ₹3 lakh). - Which of the following is typically NOT required for retail gold loan documentation?
A. Proof of identity & address (KYC)
B. Declaration of ownership (if needed)
C. Multiple guarantors always
D. Application form & photo
Answer: C — Guarantor usually NOT required for retail gold loans. - Banks usually accept bank-minted gold coins up to how many grams per customer (as per common practice)?
A. 10 g
B. 25 g
C. 50 g
D. 100 g
Answer: C — Bank-minted coins often limited to 50 g per customer. - Which of the following is true about maintenance of LTV during loan tenure?
A. Lender must maintain LTV throughout tenure and may take action if price falls
B. LTV checked only at sanction and ignored afterward
C. Borrower can raise LTV later unilaterally
D. LTV increases automatically with time
Answer: A — Lenders are required to maintain LTV; may ask for top-up or safeguards. - Which repayment mode allows borrower to use sanctioned limit flexibly and pay interest only on amount used?
A. Bullet repayment
B. EMI
C. Overdraft facility (OD against gold)
D. Fixed deposit
Answer: C — Overdraft against gold charges interest on utilization. - Which risk is primary for lenders in gold loans?
A. Exchange rate risk
B. Gold price volatility risk
C. Weather risk
D. Market liquidity risk of equities
Answer: B — Gold price falls pose risk to collateral value. - One safeguard lenders use to manage gold price risk is:
A. No valuation at all
B. Applying conservative LTV and using 30-day average price for valuation
C. Lending full value of gold always
D. Insurance of borrower’s income
Answer: B — Conservative LTV and averaging price reduce risk. - Which is NOT permitted as an eligible collateral for retail gold loans in normal RBI framework?
A. Gold jewellery
B. Bank-sold minted coins (≤50g)
C. Gold ETFs / mutual fund units
D. Ornaments with hallmark
Answer: C — ETFs/units are not standard eligible collateral. - Which of the following lenders can classify gold loans under PSL?
A. NBFCs only
B. Banks (subject to RBI rules)
C. International lenders outside India only
D. Mutual funds
Answer: B — Banks can classify eligible gold loans as PSL. - Which of these is a typical commercial advantage of NBFC gold lenders?
A. Strict branchless model only
B. Very fast disbursals (often within hours) and tailored schemes
C. Worldwide banking license
D. Lowest possible rates mandated by RBI
Answer: B — NBFCs specialise in fast processing and many schemes. - Which of the following statements about prepayment of gold loans is generally true?
A. Prepayment always attracts high penalty for all lenders
B. Many banks waive prepayment charges for gold loans — check bank policy
C. Prepayment is not allowed under RBI rules
D. Prepayment increases the outstanding principal automatically
Answer: B — Many banks waive prepayment charges; policies vary. - Which factor is NOT considered while valuing a piece of jewellery for a gold loan?
A. Gross weight of the item
B. Weight of stones/other metals (included)
C. Purity (caratage) of gold
D. Net weight after deductions for stones
Answer: B — Stones are excluded; net weight used. - Which of these product features is often offered by banks but less commonly by NBFCs for gold loans?
A. EMI options up to 36 months for retail customers
B. Very high disbursal speed within hours
C. Very flexible short-term repayment options only
D. Heavy collateral documentation
Answer: A — Banks often offer longer EMI tenures (e.g., up to 36 months in retail schemes). - Which of the following is part of RBI’s objective in prescribing valuation & LTV norms for gold loans?
A. To increase lenders’ exposure to volatile commodities
B. To protect lenders and borrowers by limiting over-lending against gold value
C. To ban gold loans entirely
D. To force customers into ETFs
Answer: B — Protect stability and prevent over-lending. - Which is the correct sequence in gold loan processing?
A. Disbursal → Valuation → Pledging → Repayment
B. Pledging → Valuation → Sanction → Disbursal → Storage → Repayment → Release
C. Repayment → Pledging → Disbursal → Valuation
D. Valuation → Repayment → Pledging → Disbursal
Answer: B — Pledge, value, sanction, disburse, store, repay, release. - If borrower wants to pledge jewellery with high stone content, lender should:
A. Include stone weight as gold weight
B. Exclude stones and value only metal; may apply discount or refuse if ownership doubtful
C. Multiply weight by 2
D. Automatically accept without checks
Answer: B — Stones are excluded; valuation careful and ownership checks required. - Which of these usages may permit classification as PSL for a gold loan?
A. Funding speculative trading in commodities
B. Short-term crop finance for farming operations (direct agriculture use)
C. Buying luxury goods for export
D. Stock market margin purchase
Answer: B — Direct agricultural purposes can qualify as PSL. - Which of the following is a typical charge levied by lenders on gold loans?
A. Processing fee, valuation fee, penal interest for delay (must be disclosed)
B. No charges are ever allowed by RBI
C. Only government fee is allowed, banks cannot charge processing fees
D. Charges for pledging are illegal
Answer: A — Lenders may levy disclosed fees like processing, valuation, penal interest. - Which of the following is true regarding KYC for gold loans?
A. No KYC required for any gold loan
B. Basic KYC (ID & address proof) is mandatory for gold loans
C. Only PAN is required always
D. KYC is optional for agri loans
Answer: B — Basic KYC mandatory. - Which of the following is a primary socio-economic benefit of gold loans?
A. Encourages hoarding of gold only
B. Facilitates monetization of idle household gold for productive use and inclusion
C. Replaces all other bank loans immediately
D. Eliminates need for banking infrastructure
Answer: B — Mobilizes idle gold for credit and inclusion. - What is the usual maximum loan limit Bank of Baroda offers on gold loans (per borrower), as noted in your source)?
A. ₹5 lakh
B. ₹50 lakh
C. ₹1 crore
D. ₹10 lakh
Answer: B — Up to ₹50 lakh per borrower (Bank of Baroda product detail you provided). - Bank of Baroda accepts gold of minimum purity commonly of:
A. 12 carat
B. 14 carat
C. 18 carat
D. 24 carat only
Answer: C — Minimum 18-carat jewellery commonly accepted. - For Bank of Baroda retail gold loans, which repayment tenure option is offered (as per your notes)?
A. EMI up to 36 months (retail EMI scheme)
B. No EMI option, only bullet for 6 months
C. EMI up to 120 months by default
D. No repayment allowed
Answer: A — Retail EMI available up to 36 months. - Bank of Baroda’s processing fee policy (as provided) typically is:
A. Nil for loans up to ₹3 lakh; nominal fee above that
B. Flat 5% on all loans
C. No fee ever waived for any loan
D. 10% for all loans
Answer: A — Nil processing fee up to ₹3 lakh; nominal above. - Which of the following statements about prepayment for Bank of Baroda gold loans is correct (from your notes)?
A. Prepayment charges are high and mandatory
B. Prepayment charges are NIL — borrowers can prepay without penalty
C. Prepayment only allowed after 2 years
D. Prepayment not permitted for retail loans
Answer: B — Prepayment charges NIL per the Bank of Baroda details you provided. - Which of the following is required to classify a gold loan as an MSME purpose?
A. The borrower must be an MSME or funds used for MSME activity and meet MSME definition
B. No condition; all gold loans are MSME automatically
C. Loan amount must be over ₹1 crore
D. Only banks can label loans MSME without checks
Answer: A — Must meet MSME definition and end-use criteria. - Which lender type is most likely to require more formal income proof for gold loans as a rule?
A. NBFCs specializing in gold loans
B. Banks (especially for larger retail loans)
C. Informal moneylenders only
D. Jewelers without lending license
Answer: B — Banks tend to require income proof for larger loans per RBI emphasis on repayment capacity. - Which statement is true about ownership doubt in pledged gold?
A. Lender must proceed regardless of ownership doubts
B. Lender must verify and may refuse loan or take additional declaration if ownership doubtful
C. Ownership is irrelevant for gold loans
D. Borrower always gets double loan if ownership doubtful
Answer: B — Ownership must be verified. - Which feature makes gold loans attractive to MSMEs?
A. Long legal procedures and documentation demands
B. Quick access to funds (fast disbursal) and usable as working capital
C. Restrictive LTV making loans impossible
D. High guarantee requirements
Answer: B — Speed and liquidity make them useful. - Which of the following lenders can include gold loans in their PSL numbers?
A. Only NBFCs
B. Only banks (subject to RBI conditions)
C. Insurance companies automatically
D. Any chit fund
Answer: B — Banks can classify eligible gold loans as PSL. - Which of the following is an example of a risk-mitigation practice used by lenders?
A. Accepting gold without valuation to speed up process
B. Using board-approved valuation policy, insured vaulting, and threshold LTVs
C. Lending 100% of assessed value always
D. Avoiding vault insurance to cut costs
Answer: B — Proper valuation, insurance, and LTV policies mitigate risk. - Which of the following consumer protections is mandated for gold loans?
A. No disclosure of charges required
B. Transparent disclosure of interest rate, fees, valuation certificate and terms at sanction
C. Lenders may change LTV without informing borrower
D. Borrower has no right to get gold return details
Answer: B — Transparency and disclosures required. - If the gold price falls substantially during the loan tenure, a lender may:
A. Increase LTV automatically
B. Ask borrower for top-up, additional security or take other contractually allowed measures to maintain margin
C. Release more gold to borrower
D. Forgive the loan automatically
Answer: B — Lenders may ask for top-up or take protective actions. - Which of the following is a usual limit applied to bank-minted coins accepted as collateral?
A. No limit — any amount accepted
B. 50 grams per borrower (common practice)
C. 500 grams per borrower
D. 5 grams maximum
Answer: B — Common limit 50 g per customer. - Why do gold loans support financial inclusion?
A. They require long credit histories only
B. They provide credit to people lacking formal income proofs or credit history by using gold as collateral
C. They are only for high-net-worth individuals
D. They replace all other bank products
Answer: B — Help unbanked/underbanked access formal credit. - Which of the following is NOT a typical feature of gold loan NBFCs?
A. Specialized focus on gold loans and high branch density in semi-urban/rural areas
B. Very slow turnaround time (days) compared to banks
C. Doorstep services and quick sanction within hours
D. Multiple product variants and flexible tenures
Answer: B — NBFCs are known for fast turnaround, not very slow.
15. Quick Tips to Remember
- LTV = 75% → remember as three-quarter rule.
- Tiered LTV: small loan → more LTV (85%); bigger loan → less LTV (75%).
- Bullet = 12 months cap.
- Eligible = jewellery & bank coins (≤50 g).
- Valuation in borrower’s presence → certificate given.