India’s RBI Pushes Gold and Silver Monetization: Boon or Bust?

 

The Reserve Bank of India (RBI) has introduced regulatory amendments aimed at making loans against gold and silver collateral more accessible, particularly for working capital needs in the jewelry sector. These changes, effective from October 1, 2025, seek to liberalize lending practices, harmonize rules across the industry, and provide banks with greater operational flexibility while maintaining financial stability. The updates build on existing frameworks like the Gold Metal Loan (GML) scheme, originally launched in 1998 to support domestic jewelry manufacturers by enabling gold monetization.

Key Changes to Gold and Silver Lending Rules

·         Working Capital Loans for Jewelers: Scheduled commercial banks (SCBs) are now permitted to extend working capital loans to jewelers using gold or silver as collateral for manufacturing or industrial processing. This is a targeted carve-out from the general prohibition on lending for the purchase of gold/silver or against primary gold/silver security.

·         Expanded Access for Smaller Banks: Tier III and IV urban co-operative banks, which were previously restricted, can now offer these loans, broadening credit availability in underserved areas.

·         Draft Directions for Gold Metal Loan (GML) Scheme: RBI has released a comprehensive draft of updated directions for the GML scheme. The goal is to further liberalize the framework, standardize regulations for eligible borrowers in the jewelry industry (e.g., manufacturers and processors), and empower banks to customize their GML policies. Public comments on the draft are invited until October 20, 2025.

Broader Context and Related Amendments

The gold and silver lending updates are part of a larger set of seven RBI directions and circulars issued to amend existing regulations for banks and other regulated entities. Other notable changes include:

·         Interest Rate Flexibility on Advances: Banks can now reduce the "other spread" components (beyond the benchmark rate) on floating-rate loans sooner than the previous three-year lock-in period, allowing quicker benefits to borrowers. Additionally, at loan reset points, borrowers can opt to switch to a fixed-rate loan at the bank's discretion.

·         Basel III Capital Raising: Revised norms on Perpetual Debt Instruments (PDIs) increase flexibility for banks to issue foreign currency or rupee-denominated PDIs overseas, helping raise Tier I capital more efficiently.

Rationale and Implications

The RBI's moves are driven by the need to support the jewelry industry—a key export sector—amid economic pressures, while promoting borrower-friendly credit terms and operational efficiency for lenders. As per the RBI notification: “With a view to further liberalize the scheme, harmonize the extant regulations applicable across eligible borrower segments in jewellery industry and provide more operational freedom to banks to devise their GML policy, a draft of comprehensive set of Directions on GML is being issued.”

Implications:

·         For Borrowers: Easier access to gold/silver-backed loans for business needs, potentially lower effective interest rates, and more repayment options, which could boost liquidity for small jewelers and manufacturers.

·         For Banks and NBFCs: Expanded lending scope (e.g., for co-operatives) and policy autonomy, enabling them to tap into the lucrative gold loan market without excessive regulatory hurdles.

·         For the Economy: These rules could enhance gold monetization, reduce reliance on informal lending, and stimulate domestic manufacturing, aligning with India's push for self-reliance in the gems and jewelry sector.

The Sovereign Gold Bond (SGB) Scheme: A "Fiasco" or a Miscalculated Bet?

RBI launched the Sovereign Gold Bond (SGB) scheme on behalf of the Government of India in November 2015 under the Modi 1.0 admin. Designed to reduce physical gold imports by channeling investor demand into paper gold, the program has indeed turned into a significant fiscal liability amid soaring gold prices. As of October 2025, the government's outstanding redemption liability for SGBs stands at approximately ₹1.5 trillion (equivalent to about 130-132 tonnes of gold at current market rates), plus accrued interest. This has sparked widespread criticism, with opposition parties like Congress labeling it a "complete fiasco" akin to demonetization, forcing taxpayers to foot the bill for what some call a "rookie mistake" in financial planning.

Critics argue the scheme was poorly hedged: Bonds were issued without sufficient physical gold backing, and repayments are tied to the average closing price of 999-purity gold over the three business days before maturity (as per India Bullion and Jewellers Association rates). With gold prices surging from around ₹2,500-3,000 per gram in 2015-2016 to over ₹9,000-10,000 per gram by late 2025—driven by global factors like central bank buying, geopolitical tensions, and inflation—the redemption costs have ballooned by 900% or more on some tranches. The government halted new issuances after February 2024 (with the last in February 2023 raising ₹8,008 crore), citing the scheme's failure to curb imports as intended and its escalating costs.

Why It's Called a "Fiasco"-RBI lost the Gold bet poorly; has no idea about such appreciation in Gold

·         Unhedged Risk: Unlike gold ETFs (backed by physical gold), SGBs were essentially an unhedged "call option" on gold prices. The government borrowed at low rates (2.5% interest vs. 8-9% on other debt) but must repay at market value, leading to massive capital gains for investors—at the government's expense. For instance, bonds issued at ₹3,000/gram now redeem at ₹10,000+, yielding 200-300% returns.

·         Fiscal Strain: This liability exacerbates India's debt burden (gross debt ~85% of GDP in FY25). With no new bonds, the government cut gold import duties in Budget 2024-25 to boost physical demand instead, but critics say it signals panic.

·         Public Backlash: Social media posts termed kit as "Modi-made crisis" and "biggest financial blunder," with posts highlighting the ₹1.5-1.7 lakh crore "loss" funded by taxpayers. One viral thread called it a "rookie mistake" for assuming stable gold prices in a trillion-dollar economy.

RBI Hedge:

·         The RBI used bond proceeds to buy 321 tonnes of gold since 2015 at lower prices, now worth ~$20 billion (₹1.7 lakh crore). RBI profits (including from this gold) are transferred to the government annually, offsetting much of the liability.

·         Strategic Reserves: India's gold holdings hit 879 tonnes (11.5% of forex reserves) by Feb 2025, a record high providing a buffer against global volatility & currency stability.

·         Still, with 60+ tranches maturing through 2032, rising prices could push costs higher unless gold dips or RBI sales intervene—risking reserve credibility.

·         Broader Economy: This highlights risks in "innovative" fiscal tools without hedges. If unmitigated, it could add 0.5-1% to fiscal deficit, pressuring borrowing costs.

RBI Now Allows Silver as Collateral for Working Capital Loans to Jewelers — A First-Time Liberalization

As per the RBI notification dated September 30, 2025 (effective October 1, 2025), scheduled commercial banks (SCBs) and now Tier III & IV urban co-operative banks (UCBs) can extend working capital loans to jewelers using silver (along with gold) as collateral — explicitly for manufacturing or industrial processing.

Key Excerpt from RBI Master Direction: “Loans against gold or silver ornaments or specially minted gold/silver coins or bars may be granted to jewelers for working capital purposes related to manufacturing or industrial processing of jewellery.”

This is a major policy shift — silver was previously NOT allowed as primary collateral under any formal RBI-regulated lending framework (except in rare, unstructured cases by NBFCs).

Why Silver Was Previously Banned as Collateral by RBI?

No Standardized Purity & Valuation Framework

·         Gold has LBMA (London Bullion Market Association) standards, BIS hallmarking, and daily fixing by IBJA (India Bullion & Jewellers Association).

·         Silver had no equivalent national benchmark until recently. Banks couldn’t reliably value or liquidate silver collateral.

High Price Volatility & Low Liquidity

·         Silver is 3x more volatile than gold (annualized volatility: ~25–35% vs. ~10–15% for gold).

·         This increases credit risk and margin call frequency.3.

·         Low Liquidity in Organized Markets

·         India has no active silver futures or ETF physical delivery ecosystem like gold

·         Banks feared fire-sale losses during default auctions.

Fraud & Adulteration Risk

·         Silver is easier to alloy or counterfeit (e.g., with copper, nickel).

·         No mandatory hallmarking existed until BIS launched Ag 999 standard in 2021.

Regulatory Focus on Gold Monetization

·         Post-2015, RBI’s priority was Sovereign Gold Bonds, India Gold Coins, Gold Monetization Scheme — all gold-centric.

·         Silver was ignored to avoid diluting focus.

NBFC Dominance in Silver Loans

·         Informal silver financing was done by unregulated pawn brokers & local NBFCs at 18–36% p.a.

·         RBI didn’t want banks to enter this high-risk segment.

RBI’s Master Direction on Loans against Gold (2015–2024) explicitly said: “Loans against gold ornaments… no mention of silver” → interpreted as prohibited.

Why Is RBI Now Allowing Silver in 2025?

Trigger-What Changed

·         BIS Hallmarking for Silver (2021–2024).

·         Mandatory hallmarking rolled out.

·         Now banks can verify purity.

·         MCX Silver ETF & Futures Liquidity; Silver ETFs (launched 2022) and MCX silver contracts provide daily price discovery and hedging tools.

·         Jewelers’ Lobbying: Gems & Jewellery Export Promotion Council (GJEPC) demanded silver loans as 70% of jewellery volume is silver (by weight).

·         Working Capital Crunch Post-COVID-Small jewelers faced high-cost informal silver loans (24–36% p.a.). Banks can now offer 12–15% p.a. secured loans.

·         Harmonization with Gold Metal Loan (GML) Draft: RBI’s Draft GML Directions (Oct 2025) treat gold & silver equally for jeweler financing.6. Risk Mitigation Tools

Banks can now:

·         Impose lower LTV (50–60% vs 75% for gold)

·         Use daily mark-to-market via IBJA silver rates

·         Require BIS-hallmarked silver only

This move democratizes credit for India’s 2.5 lakh+ silver jewelers, reduces dependence on pawn brokers, and aligns with RBI’s gold/silver monetization push — without repeating the SGB unhedged fiasco.

RBI/Government now trying for increasing Gold/Silver monetization to be used for productive purpose of the real economy?

India has huge private holdings of Gold and Silver (households, Trusts, Temples etc), lying idle for decades after decades. Estimated private Gold holdings are around 25-30K ton and Silver 500-600K ton worth almost $3.7 trillion, equivalent to India’s nominal GDP of ~$4 trillion. Only ~40 tonnes of household gold has been deposited in GMS (Gold Monetization Scheme) since 2015, showing limited public appetite for direct monetization. India’s Jewelry Sector: Holds ~15,000 tonnes of gold and ~200,000 tonnes of silver as inventory, often sourced from household trade-ins. India’s private Gold holdings are over ~5x of China (4-5KT), Turkey (3-4KT), Germany (2.5-3KT and ~25x the US’s physical private stocks (1KT), making it the undisputed leader.

Why India Holds So Much Gold & Silver (seen as poor man’s Gold in India)

·         Cultural Factors: Gold is a status symbol, wedding essential, and “women’s bank” for financial security of last resort (no tax on inherited jewelry)

·         Low financial literacy for masses; only 2-3% of the 1.5 billion population actually invests in the financial market (stocks, MFs etc) directly/indirectly

·         Steady devaluation of LCU (Local Currency Unit-INR)

·         High cost of living; prices doubling almost every 10-years @5% CPI on an average for the last few decades

·         Reduced public trust in the LCU

·         Hedge against inflation (~5–6% in 2025); gold prices rose ~300% since 2015 (₹3,000 to ₹10,000/gram).

·         Historical Accumulation: Centuries of gold hoarding, minimal selling (only ~1–2% recycled annually); public generally does not sell Gold or take loans against it unless absolutely required after exhausting all other options for some emergency or sudden financial crisis

·         Significant flow of corruption/unaccounted black money out of various government contracts (cut money) to Gold & Silver

Conclusions:

India’s real economy is now going through a rough patch for various reasons including weak labor marker, high unemployment/under-employment; huge population/labor force high cost of living and high cost of borrowing; higher cost of business compliances and subdued consumer spending & private capex; i.e. overall tepid private consumption & capex on domestic front. Globally, also Trump policy tantrum (trade & immigration) is negative for India as US is the largest source of USD for India. Thus Indian government and RBI is now trying to boost the economy through various fiscal & monetary stimulus (tax cuts, rate cuts, and ensure higher liquidity).

As a part & parcel of this targeted stimulus, RBI/Government is now trying to monetize at least a part of India’s huge idle private Gold & Silver reserve for productive purpose of the real economy. Also, such monetization may help to reduce India’s bullion import bill by some extent. In India, physical Gold & Silver in the bullion market are now in shortage due to record ETF holding/flow. But so far, there is lukewarm interest in RBI’s effort to monetize Gold & Silver and channelize it to the real economy for productive purpose.