In general, banks are mandated to offer agricultural loans up to ₹2 lakh and MSME loans up to ₹10 lakh without collateral. But in practice, borrowers often prefer pledging gold or silver ornaments to avoid the hassle of taking a collateral-free loan, senior bankers said.
The banking regulator last Friday said voluntary pledging of gold in such cases would not be considered a violation of the collateral-free lending norm.
“The RBI directive would help banks boost their priority sector lending to the farmers and micro entrepreneurs. The borrowers will be encouraged to pledge gold to get small agriculture loans or MSME loans,” a chief executive of a small finance bank said.
“In terms of agricultural loans, small and marginal farmers would benefit more,” he said.
Banks follow much stricter due-diligence for unsecured lending as compared to asset-backed lending for obvious reasons.
Typically, loans taken for growing crops or pursuing allied agricultural activities such as dairy are classified as agricultural loans even if these are taken pledging gold or silver.
However, according to RBI’s monthly bulletin, one particular bank changed the classification of a category of agricultural loans into “loans against gold jewellery” under the retail segment in May 2024. The move was possibly to avoid the regulatory glare in case it was a violation of the collateral-free loan.
“With this latest the RBI notice, no bank would hesitate in classifying gold-back crop loans as agricultural loans. It was a small change with sweeping ramification,” the bank CEO said.
Under the priority sector lending norm of 40% adjusted net bank credit or credit equivalent of off-balance sheet exposure, whichever is higher, banks are mandated to follow sub-targets for different segments of the economy.
For agriculture and allied sectors, banks need to adhere to a 18% target. Within this, 14% is prescribed for non-corporate farmers, out of which a target of 10% is set for small and marginal farmers.
Banks are also mandated to follow a sub-target of 7.5% towards lending to the micro enterprises.
