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RBI Clarifies on Voluntary Pledge of Gold and Silver for MSME Loans
In a move poised to enhance access to formal credit for Micro and Small Enterprises (MSEs), the Reserve Bank of India (RBI) has issued a significant clarification permitting banks to accept voluntary pledges of gold and silver as collateral for Micro Small Medium Enterprises (MSME) loans even when the loan amount falls within the collateral-free lending thresholds. This clarification was issued vide Circular bearing Reference No. RBI/2025/2026/66 FIDD.CO.FSD.BC. No.08/05.05.010/2025-26 dated July 11, 2025 (“July 2025 Circular”).
Under the Master Direction on Lending to Micro, Small & Medium Enterprises (MSME) Sector, issued on July 24, 2017, banks were required to extend collateral-free loans up to ₹10 lakh to MSEs, particularly those financed under the Prime Minister Employment Generation Programme (PMEGP) administered by the Khadi and Village Industries Commission (KVIC). In some cases, this limit could be extended to ₹25 lakh based on the borrower’s track record. This directive was designed to reduce access barriers for small entrepreneurs and foster financial inclusion.
In response to the evolving credit ecosystem, the RBI issued the Lending Against Gold and Silver Collateral Directions, 2025, on June 6, 2025. These directions harmonized previously fragmented regulations, introducing a uniform regulatory framework for lending institutions.
Key safeguards under the June 6 directions include:
- Loan-to-Value (LTV) Ratios:
- Up to ₹2.5 lakh: Maximum LTV of 85%.
- ₹2.5–5 lakh: Maximum LTV of 80%.
- Above ₹5 lakh: Maximum LTV of 75%.
- No detailed credit appraisal is required for loans below ₹2.5 lakh.
- Gold and silver must be valued using objective market prices sourced from recognized entities such as IBJA or SEBI-regulated exchanges.
- The assaying process must be conducted in the borrower’s presence and duly certified to ensure transparency.
These measures were introduced to enable secure yet borrower-friendly credit, particularly for MSMEs with limited documentation or credit histories.
Despite the introduction of the new framework, interpretational ambiguities emerged. Specifically, concerns arose regarding whether loans backed by voluntarily pledged gold or silver could still be classified as “collateral-free” under RBI norms. Many borrowers, especially in rural and semi-urban regions, voluntarily offered gold or silver to access better interest rates or faster disbursements but were uncertain whether such loans would jeopardize their eligibility under schemes like the PMEGP.
To address this ambiguity, the July 2025 Circular provides much-needed clarification. It explicitly states that the voluntary pledge of gold or silver by a borrower does not violate the collateral-free lending norms, provided such a pledge is entirely voluntary and not mandated by the lender.
The clarification is applicable to the following categories of financial institutions:
- Scheduled Commercial Banks.
- Small Finance Banks.
- State and District Central Co-operative Banks.
- Regional Rural Banks (RRBs).
For MSMEs, especially micro-enterprises operating without formal credit histories, this clarification opens up a pragmatic middle ground; they can voluntarily leverage household assets such as gold and silver to access more favorable credit terms without forfeiting the benefits of collateral-free loan classifications.
From the lenders’ perspective, the clarification enables risk-adjusted lending without undermining the spirit of RBI’s inclusionary mandates. It also supports banks in meeting their priority sector lending targets through secured, but policy-compliant, disbursements.
The RBI’s move exemplifies a balanced regulatory approach, reinforcing borrower autonomy while enabling secured lending. It holds particular promise for underserved regions, where informal assets like gold often play a crucial role in household finances.
As India continues to deepen financial inclusion and nurture its expansive MSME sector, such clarifications are far more than procedural updates; they are instruments of equitable economic empowerment. By allowing voluntary pledging within a well-regulated and transparent framework, the RBI has facilitated both dignified credit access for borrowers and risk-calibrated lending for banks.
