The Reserve Bank of India (RBI) has raised the limit for Gold Loans under the Bullet Repayment scheme from Rs 2 lakh to Rs 4 lakh for Urban Co-operative Banks (UCBs).
It will bolster the banks’ lending capacity and provide accessible credit options to the lower-middle-class population that forms the majority of UCB’s customers. The decision is in line with RBI’s commitment to incentivize UCBs that are able to meet the prescribed Priority Sector Lending (PSL) targets as of March 31, 2023.
Priority sectors, like agriculture and MSMEs, vital for India’s development, receive lending priority from banks, as mandated by the government and RBI to meet set targets. The PSL targets for UCBs were revised in 2020, providing until March 31, 2024, to achieve the goals. As part of the incentives, select UCBs are granted extended lending limits on bullet gold loans.
Under the bullet repayment scheme, borrowers are required to repay the entire principal and interest amount at the end of the loan tenure, unlike loans with monthly equated instalments (EMIs), eliminating the need for periodic payments during the loan term. Although interest is calculated each month, it is payable only at the end of the gold loan tenure in a single payment.
Loans under the scheme have a maximum maturity period of 12 months, and the loan-to-value ratio should be 75 per cent of the gold pledged, as per RBI guidelines.
RBI’s decision is expected to enhance UCBs’ lending capacity, particularly in the gold loan segment, providing borrowers with more credit options. It aligns with the central bank’s efforts to support UCBs in fulfilling their priority sector lending commitments and promoting financial inclusion. RBI is expected to issue detailed guidelines on this matter separately. It emphasized that UCBs must continue meeting the prescribed targets and sub-targets in the future.