RBI’s ban on loans against gold ETFs raises analysts’ hackles

The Reserve Bank of India (RBI) has released a draft framework proposing a revamp of the guidelines governing gold-backed lending. The aim is to strengthen risk controls and standardise practices across the financial sector. The proposed changes are poised to affect a broad spectrum of lenders, including banks, non-banking financial companies (NBFCs), cooperative banks, and regional rural banks (RRBs).

According to the Draft Reserve Bank of India (Lending Against Gold Collateral) Directions, 2025, the RBI has stated: “Lenders shall not grant any advance against primary gold/silver or financial assets backed by primary gold/silver like units of Exchange-Traded Funds (ETFs) or units of Mutual Funds.”

However, the central bank’s move to explicitly bar the use of gold ETFs and gold mutual funds as loan collateral has sparked more concern than reassurance. Cloaked as a prudential safeguard, the decision appears less like modern risk management and more like a step backwards.

Vikram Dhawan, Head-Commodities and Fund Manager at Nippon India Mutual Fund, said, “At a time when India aspires to be a financial powerhouse and deepen its capital markets, this policy direction sends all the wrong signals. In effect, it penalises investors for choosing transparent, regulated, and liquid financial instruments over dusty lockers of physical gold. The message is clear: if your gold isn’t in physical form, it isn’t good enough."

A Global Outlier 

Globally, the use of ETFs as collateral is not just accepted; in fact, it is encouraged. Dhawan cites three instances:

In the U.S., regulators allow gold ETFs to be pledged as collateral under several lending frameworks. They are deemed sufficiently liquid and are actively used in margin financing and securities lending.

The European Central Bank has adopted a similarly progressive view, treating certain ETFs as acceptable high-quality liquid assets (HQLA) under Basel III.

In developed financial markets, ETFs are often used as collateral for repo agreements, margin loans, and structured finance instruments.

In contrast, Dhawan says that "the RBI’s move appears not only protectionist, but also disconnected from modern financial practice. India is essentially discouraging the very market instruments it needs to reduce its reliance on physical imports and bolster financial savings". 

Collateral Damage

Market experts say that the broader implications are severe:

• Lower financial inclusion: Small investors who have moved to digital gold instruments now find themselves excluded from credit facilities.

• Stifled innovation: Fintechs and NBFCs attempting to offer smart credit products using ETFs are forced to rely on outdated collateral models.

• Greater informal lending: Those denied formal loans may turn to unregulated lenders, creating more risk—not less.

Thus, if India aspires to be recognised as a serious global financial hub, its regulatory framework must keep pace with the evolving market landscape. A one-size-fits-all approach that remains anchored in physical gold does a disservice to both investors and lenders, the experts say. Gold ETFs are not only secure, they represent the future of gold investment, they add.

“Rejecting well-regulated, liquid, and exchange-traded instruments as valid collateral signals a continued distrust of financial gold. This disincentivises digital adoption and pushes savers back toward physical hoarding—defeating the broader objectives of financial formalisation, capital market deepening, and monetary stability,” says Dhawan.